A friend, Kat from I Heart 7, recently asked about increasing life insurance for her as well as her husband. She asked,
How much life insurance should we have? We have 7 children, and want to pay their way to college. We already have policies, but I’m not sure if I should increase them.
While talking about death, and loss can be hard the peace of mind it brings is worth the emotional toll this conversation may have. I applaud Kat for already having some insurance in place, and reexamining their insurance needs.
While you may not have seven kids (I bow down to Kat and her husband, Barry), many parents have the same question-how much is enough to leave behind to help my spouse or a guardian care for your children?
Before we talk life insurance though, it’s important to know that you need some other important things in place. If you’re thinking about life insurance that means you are planning ahead (which I love!), something everyone need to do.
Make sure you have a will and living will in place. If you already have one-check to see if it needs updating. Any major life changes means it needs to be updated. I recommend hiring a lawyer for this since it can be complicated, and many online or fill in the blank resources aren’t going to cover all your needs.
Have an emergency fund in placeIf you don’t have an emergency fund, get one in place as soon as possible. This will help with any immediate needs including burial and funeral fees, and time prior to receiving life insurance funds.
Choose a guardian. This is one of the toughest decisions you can make as parents. Often grandparents aren’t at an age where they can take care of young children, so choosing a guardian is necessary. It’s a tough decision, but one that must be made.
What kind of life insurance should you have?
First, let’s start with what kind to purchase. You should purchase term life insurance in most cases. Whole life insurance policies are considered an investment, but not one that you should make unless you’ve maxed out all your other investing options. Term life insurance is also relatively inexpensive.
If you’re under 30, whether you have kids or not, it’s a great time to buy life insurance. Your premiums will be lower, and you can secure that rate for a 20-30 year term which is useful if you enter into marriage and family life.
If you already have children consider if you may be adding to your family. This will affect the length of your term.
How much life insurance do you need?
Figuring out the amount can seem tricky, but it’s fairly simple. You’ll just need a pen and paper, and to go through a series of questions.
You want to take the amount you make and multiple that by the number of years of gross income that would need to be replaced until your children are on their own. Using the gross income helps account for taxes, health insurance, and even 401k contributions.
You also want to include burial costs (which average $8-10,000), and the need for additional help at home. For instance you may need a nanny, babysitter, or childcare if one partner takes care of the children more often. (IE one of you leaves work early, or you travel for your job)
If you have a child with special needs or a disability consider the costs of additional care for them as well.
Think also about the lifestyle your spouse or their guardian would have–would you rather have someone stay at home with them (or consider that option), work fewer hours or at a less demanding job? That may mean increasing your life insurance needs.
Lastly, consider if you would want to send your children to college, or set up a trust fund for them. This will add to the overall cost of your insurance needs.
While I’m not an expert, the math below comes from my experience. If you aren’t sure how much life insurance you need you can use this example as a guideline.
Figuring out how much life insurance you need (an example):
Basic info: Kathy (28) and Joe (30) have 2 kids (ages 2 and 4), and Kathy stays at home with the kids 3 days a week. The other 2 days she works part-time, and the kids go to preschool.
Family plans: They are considering having another child in the next year.
Income: They have a combined income of $60,000. Kathy earns $10,000/year (all of which goes towards the children’s school and activities), but plans to return to work in 4-6 years where she will earn $50,000/year. Joe earns $50,000/year and has medical and dental benefits for the family.
College Expenses: They plan to help their children with $50,000 in college expenses, and have been saving steadily since before their first child was born. They currently have $10,000 in a 529 plan.
Debt: They have $10,000 on one car loan, and owe $200,000 on their home. They have no other debt.
Savings: They have $20,000 in an emergency fund. Joe has retirement savings of $50,000, and Kathy has $12,000 in retirement savings.
Current life insurance: Joe gets 3 times his salary in life insurance from his company at no cost. They have no other life insurance.
Joe should consider a 25 or 30 year term policy for $1,500,000 dollars. This will cover the salary that isn’t currently covered by his life insurance through work, burial costs, and will allow Kathy to help each of the kids with college, and pay off their home.
Kathy should consider a 25 or 30 year term policy for $1,000,000 dollars. This will cover childcare costs, her salary, burial costs, and allow Joe to help the kids with their college costs, and pay off their home.
Should both Kathy and Joe pass away they have named Kathy’s sister (who is a stay at home mom to one daughter) and her husband as their childrens’ guardians. The funds will allow the family to care for their children, and allow them to set up a fund for each child for college and future expenses.
The examples above are rough estimates, but demonstrate how much you would really need to leave behind. It’s much more than you think you’d need, and while you could ‘get by’ without it, typically life insurance is so inexpensive it’s worth it for the peace of mind.
Do you have any questions? Leave them in the comments-and I’ll share in my next Q&A post.
For more info on estate planning, life insurance, and wills–see my post Don’t Fear the Reaper, Plan Now.