Do You Have Enough Life Insurance to Protect You and Your Family?

January 19, 2018

If something happened to you, would your loved ones be in a tough spot without your income? While it may be difficult to consider that scenario, life insurance is a way to help ensure your family will stay financially afloat after you’re gone.

But if you purchased life insurance years ago — perhaps before you had a house and children — you may need to bump up your coverage. Your employer may offer a plan, but it may not be enough to cover all your needs.

One basic rule of thumb is that the death benefit on your policy should equal seven to 10 times the amount of your annual salary. But, like any rule of thumb, that isn’t always particularly accurate.

Another way of looking at it: You need to figure out what income you want to provide for your spouse or other beneficiaries when you die. From that sum, subtract all the other income sources they will be able to tap: retirement accounts, pensions, Social Security (for your spouse). The resulting number is the shortfall you’ll want to fill with life insurance.

Everyone’s needs are different, so here are a few questions to consider that should help put you on the right track.

How old are your kids?

If you’ve got toddlers, your life insurance needs look very different from someone with older teenagers. If you die and leave your spouse with a 1-year-old and 3-year-old, he or she has nearly two decades to get through without your income — not to mention college costs. The younger your children, the more coverage you’ll want.

Has your income changed?

When you bought life insurance originally, you may have been 10 years younger and making less money. Now that you’re older and further up the career ladder, you’re probably earning more, so the general rule of thumb — that you buy 7 to 10 times your income in life insurance* — may work out to be a higher number now.

If you’re a stay-at-home parent, you may not earn a paycheck, but if your children are small, it would cost money to cover the care you provide. Even when your children are in school, you’d likely need after-school care or sitters, so this would be an ongoing expense until your children are older and self-sufficient. Think about what that would cost per year and how many years you might need it.

What do you still owe?

List the expenses in your life that are ongoing — mortgage, car payments, and any big credit card balances or private student loans. Debt doesn’t disappear when you die, and your spouse will have less income with which to make payments. Some debt, such as credit card debt, may be forgiven, so to speak, if the estate doesn’t have enough assets to pay the balance — but if a spouse was a joint account holder, he or she may be liable. You may want to have enough life insurance to pay off the major debts, or at least to make it possible for your spouse to make payments for many years, if necessary.

Do you plan to cover college?

No matter how old your children are, if they may be likely attend college, that may be a massive future outlay. In addition to buying coverage at a multiple of your income, you may want to add extra for anticipated college costs. Consider bumping up your life insurance by $100,000 for each child’s college fund. If you have two kids, that’s $200,000.

What about funeral expenses?

The typical funeral now costs $7,000 to $10,000**, which is a big bill to cover if an income earner has just died. If you factored this into your original total, that’s fine. If you didn’t, you may want to increase your numbers to cover this cost.

What you can do next

Try out the following Life Insurance Needs Calculator:

Also contact your insurance representative for a comprehensive insurance review if you have not done this in a while.

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