Hello SOTGC community,
#YOLO (a.k.a. You Only Live Once) has become a hashtag phenomenon in twitterverse that is often accompanied with some ridiculous behavior. I decided it could use a #responsibleYOLO spin, followed by some solid advice.
Life insurance is an often ignored and under prioritized need in one’s financial situation. However, it couldn’t be more important to protect your family, and I’ve seen the results that not having appropriate insurance can have. Ultimately, obtaining the appropriate amount of life insurance is not about you. It’s about your family and making sure they’re protected in case something happened to you. If you are married and/or have children that are dependent on your income, how would your salary be replaced in the event of your death? Would your spouse be able to maintain the household expenses? What about the mortgage payment?
Whether you are the main breadwinner, contributing a portion of the household income, or staying at home with the kids, there are contributions you are making, whether financially or in the form of a “value” provided through the activities that you perform, which should be protected.
Below are some items to consider when evaluating the amount of life insurance you need:
Income Replacement and Time Frame: How much income would your family need if something were to suddenly happen to you and for what time period? For example, if you’re 30, married, and have a child at home, you may need your life insurance to cover costs until your child is 18 and then until your spouse retired at age 65. This includes amounts they would need to maintain lifestyle and household expenses. Be sure to account for other income sources available such as your spouse’s wages, interest, and dividend payments, etc.
Debt Load: Consider the outstanding balances on any mortgages, car loans, student loans and any other types of debt. Total these values and incorporate the number into your life insurance face value. Being able to pay off these balances would decrease the income replacement percentage that your spouse or family would need if they lost your income.
College Expenses: If you’re planning to pay for all or a portion of your children’s college expenses, it’s best to look up the average cost of college in today’s dollars. According to Savingforcollege.com, the cost of a 4-year degree at a public university for those with in-state residency is $37,800 (not including room/board, books and other fees). Start by incorporating today’s costs into your policy and reevaluate over time. If something were to happen to you today, the proceeds could be invested and allocated in such a way to grow and keep up with future expenses.
Final Expenses: Depending on the type of service you want, final expenses can range from a few thousand to $15,000+. The FTC offers this guide for pricing out and comparing the costs between different providers and options. A general rule of thumb is to include $10,000 – $15,000 in the face value of your policy to cover final expenses.
Current Asset Level: Be sure to consider any amounts that you already have stocked away such as savings accounts and money markets, 401(k)s, IRAs, Roth IRAs, stocks, mutual funds, etc. These are assets that will also grow overtime and help to supplement income needs.
The Value of What You Do: Even though one spouse may stay at home, there is still value provided through activities such as childcare, housekeeping, yard work, and more that would have to be replaced by either the surviving spouse taking over or paying for daycare, gardening, or housekeeping services. Be sure to incorporate these expenses into your life insurance needs estimate.
Keep in mind that the amount of life insurance you and/or your spouse need will change over time as your situation changes. With family additions, home purchases and upgrades, income level fluctuations and more, the amount of your insurance coverage should be evaluated on an annual basis at a minimum or immediately after a change to your financial situation.