It’s one of the first questions that comes to mind for me when I hear of someone dying prematurely. Did they have life insurance? Was it enough? These questions are all fresh in my mind especially, with the recent death my husband’s uncle. He died as a result of a tragic work accident at just 62. On top of everything I know Jeff’s aunt will deal with emotionally, I hope she won’t have to deal with the stresses of worrying about money.
I’ve worked with many widows and widowers to help manage their finances after the loss of a loved one. It’s much easier when there’s enough that they don’t have to worry. So how do you know how much is enough when it comes to life insurance?
There are lots of quick calculators and tools out there that can generate some figures to help you determine how much insurance you need. In reality though, I find there are a lot of varying factors that should be considered. Here are some guidelines.
What stage of life are you in? Your insurance need when you have a young family will be different once your children have grown and moved out. Your insurance need is likely to change again once you retire. So consider who’s dependent on you and your income and how long will they be dependent on you.
What type of expenses do you want to cover? Most life insurance analyses will include the total of your debts such as your mortgage, personal loans, auto loans, credit cards, and any other debt your heirs would be liable for. College expenses are also often included as part of the insurance analysis. It may not be your intent, or even feasible, to cover 100% of college expenses for your children. So consider if college expenses should be provided for and if so at what level. Finally, you’ll want to discuss lifestyle expenses, the day-to-day living expenses that you may want to replace for your survivors.
Don’t forget to consider childcare costs. Sometimes, couples underinsure the spouse who is staying home to care for the children not thinking about the costs of the childcare services they would need to hire in order for the surviving spouse to keep working.
What other income resources will your survivors have? Perhaps you have a two -income family and your surviving spouse/ partner would continue working. Though, you may want to build in some coverage for extended time off to grieve and settle estate affairs.
Even if one of you is currently staying home full or part-time to care for the children, discuss the likelihood of returning to the work force. For example, if Jeff died, I would increase my part-time work until Luke went to school and then I would work on a more full-time basis. Even, working full-time my income wouldn’t be equivalent to Jeff’s. So depending on what type of lifestyle we anticipated maintaining, I may still need some additional funds to help with my day-to day expenses.
If you are retired or near retirement, consider your pension benefits. Will pension benefits continue on to your surviving spouse? Does you’re spouse have their own pension? Are there enough assets in retirement accounts and savings account to provide for the remainder of the survivor’s life?
I’ll mention, Social Security survivor benefits here, but considering the cost of living today, they don’t amount to much. Please don’t bank on Social Security benefits providing for your loved ones.
Finally, consider other assets you may have such as savings accounts, stock portfolios, and retirement accounts. Just don’t include them if they are specifically ear-marked for other goals. You don’t want your survivors to have to deplete a retirement account to meet their daily expenses and then not have anything left for retirement.
How does your insurance coverage fit within your entire financial plan? If you have other heirs or specific inheritance goals, you may wish to use life insurance to meet them. I recently increased my own life insurance coverage not necessarily to leave for Jeff, as his income plus my existing life insurance and assets would have provided enough for him and Luke, but rather to provide for Luke in the case that we both should die. Since Luke is so much younger than Jeff’s other children we wanted to plan for additional resources to help with both his living expenses and future college expenses.