Time and time again, I read or hear stories about how a middle-income family with children experiences a catastrophic event where one of the parents dies. This is one of the worst case scenarios for a young and growing family trying to raise children while living paycheck-to-paycheck. And while the loss of a parent brings unimaginable pain and emotional suffering to the family—especially the children, the financial effects can last through their entire upbringing. However, receiving a $1,000,000 check from an insurance company during this time of healing can do a lot to help the family continue its pursuit of family life and goals it had originally planned on.
So, how much life insurance should the parents of a young family have in-force? There are many ways to establish a baseline of insurance benefits that would (not could) benefit the surviving family members when a parent dies during their ‘critical child rearing years.’ Once measure is taking a multiple of current and expected income. But there are other factors to consider.
As an example, if a parent brings in a salary of $120,000/yr. and is the sole income source for the family (i.e. mom stays home with the kids), $1,500,000 might be a good starting point. The surviving parent could invest these proceeds into a well-diversified portfolio of investments and possibly draw out $75,000 to $100,000 per year to supplement their income. While this withdrawal amount is not guaranteed, nor would it necessarily continue in perpetuity, it would definitely buy time for the surviving spouse to possibly get a part-time job to supplement the remaining difference in family income. This could also provide some funding for social activities, college funding, and other living expenses beyond the basics.
Another way to determine an appropriate amount of life insurance is to add up all of your current, near term, and long-term goals, use a time weighted average return on an investment and calculate the amount you may be able to draw from periodically to cover those expenses. In short, life insurance proceeds are there to cover the survivor’s needs…and more is better than less!
The sometimes negative view of life insurance isn’t’ without warrant; there are three reasons (or excuses) I hear all the time from people. 1) Premium cost, 2) I’m not going to die, 3) its money wasted if I don’t die. I’m not going to go into details here, but I have an answer to all three: 1) We can find a premium you can afford; 2) you are going to die one day; and 3) there is life insurance that “you” and your heirs can use—you don’t have to die to use it!
Call me to discuss your options. I promise you’ll feel better knowing what is available, and there is no obligation or pressure for you to commit.