Do you have enough life insurance?
If you died today, your family and friends would naturally be sad and devastated. So what could be worse than losing a loved one? Nothing. But when things are already so bad that they seem to not be able to get any worse the reality sinks in that there are still bills to pay. The surviving spouse probably still has a mortgage, car payments, credit card bills, not to mention if there are children then there will be billings for child care and so forth.
This is a deviation from my normal blog. Every so often I will post a random thought as the one above and we’ll call it a Financial Health Checkup for lack of a better term. I try not to get on my soapbox too often but it’s important for people to understand what role they play in supporting their family. That way, if you were not here to support your family you would know what it would take to make sure your loved ones were taken care of and able to maintain their livelihood - without losing the house to the bank or not be able to go to college, etc.
So how do you know if you’re adequately protecting your family? Well, there has traditionally been a rule of thumb that having a life insurance policy with a face value of some multiple over your salary is sufficient. I reject these multipliers as simple nonsense. They simply do not take into account the actual needs of the individual and his or her family; everyone’s situation is (at the very least slightly) different. One thing that the multiplier does not take into account is that with the more children under 18 that a surviving spouse is forced to raise on their own, the more the parent will face increased childcare expenses. The multiplier has historically been used to estimate the cost to pay off debt and free the surviving spouse’s income to tend to the day to day needs of providing for the family rather than paying the mortgage and car loan (which we will simply refer to as overhead - not to purposefully make a pun with the housing reference).
But beyond paying off the mortgage, car, and credit cards that so many of us have come to rely on, there is also the goals and future plans of the family that are interrupted when a family member unexpectedly dies. What about children that were planning on going to college (the ever so dreaded words “law school” or “med school” etc)! What about those annual vacations to Disney or the Grand Canyon. Ok, so the family doesn’t need to go on a trip EVERY year… but they also shouldn’t feel like they can’t do something just because the financial picture is tighter after losing a loved one. It’s bad enough that they had to endure the loss of a loved one, now you want to force them to eat microwave dinners and give up simple luxuries that they had before the unfortunate loss?! Life insurance is meant to keep a family able to enjoy life with one another and continue to pursue the dreams that they have. You can’t get a financial equation to devise a way to calculate that number, it’s unique to each family and situation.
What I’m NOT suggesting is being over insured. Let’s keep in mind that the unexpected and untimely death of a loved one is still a remote possibility in most of our lives. Over insuring only impairs the family’s finances by paying too much in insurance premium, money that could be used to pay down debt, save for college or retirement, and other goals of the family.
When the family knows what goals it wants to achieve and how much resources it will take to reach those goals, from there it becomes a matter of adequately protecting the family from the unlikely event of a death that could derail the goals from being achieved financially. 1. Set realistic goals, 2. determine what costs you would need to cover and if any of those costs would go up because you would not have the support of a lost wage earner. Do the kids spend more time in daycare because the one parent who got off work early is no longer there to pick them up from school? And so on. 3. Keep in mind inflation and the possibility that the lost family member may have received pay increases in future years (through promotions and cost of living adjustments in salary). You might only make $50,000 per year now, but 10 years from now would you be earning that same $50,000? Probably not. You might be making $60, 70, or even more. You owe it to your family to build in that increase over time to beat inflation.
Talk to a licensed agent. Gather the facts on what it would take to sustain your quality of life and provide for your family’s future. Then put a plan into action to solve those future goals and hurdles that the family would face if you weren’t there to help them. They will do the same for you. And while you will miss them if they die unexpectedly, you will be able to maintain your family’s existence and ultimately your sanity as you won’t feel defeated and crushed financially.
I will add more posts in the future about the various types of life insurance, for now, this was just a financial health check up. Enough of the soap box, as always I welcome your comments and feedback…