Life Insurance for Families: How Much is Enough?
When parents take out life insurance policies their primary goals are the protection of the surviving spouse and the children in the event of their death. Generally the concerns go well beyond living expenses to matters of debt resolution, medical care, education, and the realization of future dreams. The driving questions, however, are:
– What kind of life insurance policy do I need?
– How much coverage should I take out?
There are two basic types of life insurance:
– Term life policies are taken out for a specific period of time and for a specific dollar amount. Beneficiaries receive that specific dollar amount only.
– Permanent life policies (sometimes called “whole”) provide life-long protection and build cash value over the duration of the policy. Crass as it may sound, the longer you live, the more the policy is worth.
All insurance advisers agree that the best time for parents to purchase life insurance policies is when they are young and healthy. This is, of course, a difficult budgetary time when most families are raising young children. As a rule of thumb, term life polices cost less than permanent coverage, but there is the added benefit that you can borrow against the current value of a whole life policy. In the end, however, each family must make an individual evaluation and many choose to insure the primary wage earner only.
There are many formulas for figuring how much life insurance a parent requires, including online calculators. Three fairly simply and standard formulas are:
– Multiply your income times 8.
– Multiply your income times 6, factoring in predicted one-time expenses like paying off your mortgage.
– Total up all expenses, both one-time and long-term, and multiple that figure times the number of children in the family.
Of the three suggested methods, the last is the most realistic for families with multiple children. This scenario, however, assumes a two-parent household. It is as important — actually more important — for single parents to have life insurance coverage. Consider one staggering figure. It can cost between $200,000 and $250,000 to provide a single child with daily necessities only from birth to age. Especially in single family homes it is important to ensure that your child’s quality of life will continue in your absence and that their educational needs will be addressed.
Remember, any life insurance you carry as a benefit of your employment is, more times than not, insufficient for the actual needs of your family and, if you lose your job, you lose the insurance. Speak with your insurance agent and explore your options. Many term policies can be converted to permanent status once they expire, which can help you to save premium dollars in the short term. In the world today, however, life insurance for parents has become a necessary expense to gain peace of mind and to protect the long-term interests of your surviving spouse and children.