Protect Your Family By Annually Evaluating Your Life Insurance Needs
Although it's uncomfortable, it's important for you and your family to regularly discuss the need for life insurance. One of the biggest risks to the well-being and financial stability of your family is the significant reduction of family income resulting from the death of you or your spouse. This risk is especially large for single parents who are the sole provider for the family.
Life insurance isn't there for you, it's there to provide for the people you would leave behind; and it is one of the most important aspects of your family's financial plan. If you or your spouse were to pass, your family loses the economic contributions that would otherwise be made to the family. Beyond the lost income, your family may need life insurance to help pay off the mortgage or other debts, fund a child's college education, build a secure retirement fund, and help with other goals. As with most things in personal finance, life insurance can't be a "set it and forget it" thing.
Every year, you should reevaluate your need for life insurance, including the amount your family will need if you (or your spouse) were to die. Although a proper financial plan will reduce your need for life insurance over time, there are key events in life which necessitate the need to increase your life insurance.
Questions to Ask to Understand Your Life Insurance Needs
Each year, ask yourself the following questions to see if your family needs to increase life insurance. As you read the questions, even if the answer is "NO" you should verify you have enough life insurance for the purpose addressed in each question. For example, you may not have purchased a home this year. But if you purchased a home five years ago and your current insurance isn't enough to help pay off the loan, the question should spur you to explore increasing your life insurance.
Did We Purchase a Home This Year? (Or refinance one)
If you purchased a home or increased the mortgage amount through a refinance, you will need to increase your life insurance to accommodate for the new debt. It's often said your home is your biggest investment. Your home is also your biggest expense and represents your biggest risk if the family income were significantly reduced.
If a death were to occur, could your family still make the mortgage payment each month without using savings? What sacrifices would have to be made in order to keep the family home from being foreclosed on? To help provide for the family, your life insurance should be sufficient to ensure your family can comfortably pay the remaining mortgage.
One method of dealing with the mortgage is for each person to have enough life insurance to pay off their 'portion' of the mortgage based upon the percentage of the family's income they bring in. So the spouse who makes 60% of the family income would have life insurance sufficient to pay off 60% of the mortgage.
Did We Get Married This Year?
Marriage is one of the key life events which actually causes people to buy life insurance, and for good reason. When you get married, you are no longer responsible for solely yourself. You now have a spouse who depends on you. Your family financial plans will be based on both of your incomes, including the family debts and expenses. The loss of one spouse will leave the surviving spouse emotionally devastated. It is important they are not financially devastated as well.
The surviving spouse will still need to pay the family expenses, save for their retirement, raise the children, and achieve other family goals all without the support of the deceased spouse. Each spouse should have enough life insurance to replace their income for a reasonable period of time to provide for the family needs.
Did We Have a Baby This Year?
he birth of a child is a wonderful thing, but it brings with it a need for additional financial planning. The family needs to plan to provide for the child until they are 18, fund the child's education, and possibly set aside money to help pay for a wedding or the down payment on their first home.
As your family builds the resources to fund these needs, your family is exposed to the risk that one parent won't be there to help fund the education savings or other savings account. As a result, the birth of a child should always trigger a discussion about the need for additional life insurance.
Additionally, if one parent stays home instead of working, the need for life insurance on the stay-at-home parent may not diminish significantly. The family still relies on that parent for child care and care of the home. The cost of replacing the non-working parent with professional services can be significant.
For my wife and I, we looked at the cost of childcare when we were expecting our first child. In our area, childcare could cost as much as $3,000 a month. That's nearly $36,000 a year or $500,000 until the child turns 14!
Did Someone Get a BIG Raise?
The normal growth of the family income usually doesn't require an increase in the family life insurance needs. But a significant change in income, such as one that often comes from completing a degree or certification, can change the life insurance needs of your family.
Significant increases in income are usually followed by comparable increases in the family expenses. This isn't the best use of increases in income, but it is a reality for most families. When this happens, the family often doesn't increase life insurance to accommodate for the increased expenses the new income is allowing for. This can leave the family at risk should the income be lost.
If your family has recently seen a significant increase in income, evaluate your expenses and other financial obligations to determine if you have enough life insurance to provide for the family.
Did We Start a Business?
Entrepreneurship can often provide for significant wealth generation for the family, but it also carries with it unique risks. Income generated from owning a business isn't the same as income generated by a job.
Starting a business often brings with it business-related expenses, business debt, and other obligations the business (and the family) will have to pay for. Just like if you had a normal job, the death of the entrepreneur could significantly reduce or even eliminate the income to the family. With a business, however, the business expenses and debts will still need to be paid. This could leave the family with not only a reduced income, but additional expenses with no way to pay for them.
If you own a business, evaluate the business financial statements to determine if additional life insurance is needed on the family members who are key to the operation of the business. If the business expenses and debts constitute an additional risk to your family, an increase in life insurance could be needed.
Determining Your Total Life Insurance Need
When determining the amount of life insurance your family needs on each person, remember that life insurance is a cumulative need. You can't just insure the 'biggest' risk. You will need enough insurance to provide for all of the needs of the family, including all of the ones listed above. If your family home requires $200,000 of life insurance, a raising the child and their education requires $150,000, and replacing the spouse's income requires $500,000, the family will need a $850,000 life insurance policy.
Fortunately, many of these insured needs diminish over time. As you make mortgage payments, the family needs less and less insurance to help pay off the mortgage. As you save for your child's education in a 529 plan, the family needs less and less insurance to provide for the child. And as the business becomes more successful, the business debts are paid off and the founder becomes less necessary.
If you feel overwhelmed at the prospect of figuring out how much life insurance your family currently needs, there is help. Consulting a financial advisor or professional life insurance agent can help you determine the total need for life insurance for the family.
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