Insurance, particularly life insurance, is a topic that most people don’t want to think about. It isn’t easy to think about dying unexpectedly and leaving behind your family, nor is it easy to imagine if your spouse is the breadwinner and you would be left in financial difficulties by his or her death. Though it is a difficult subject to discuss, it is vital, particularly if you have dependent children.
First you should determine how much life insurance you need. If the primary breadwinner were to die, you need to replace the income they now bring in, plus extra funds to offset additional expenses that may not be obvious. For example, if the primary earner maintains the cars and the surviving spouse doesn’t know how, you would want to add in the average costs for maintenance and repair for your vehicles. If the surviving spouse has been out of the paid workforce for many years, it would be wise to have enough insurance to cover the cost of the surviving spouse returning to college to be better able to support the family.
There is also income that is not readily apparent, such as employment benefits like subsidized health insurance and company contributions to a retirement plan. This can easily add up to hundreds, if not thousands of dollars per month in “hidden” income. Funeral expenses and the costs of settling the estate should be included too.
There are insurance experts who recommend determining the amount of a life insurance policy based on a multiple of the salary of the primary earner. One number you hear often is that your insurance should equal 20 times your salary before taxes. The logic behind this figure is that if the benefit were invested in bonds paying 5% interest, that would produce income equal to the primary salary at death. That way, survivors could live from the interest and could leave the principal alone.
So, supposing you are the primary earner and you make $50,000 per year. A good place to start when estimating your needs would be to multiply that by 20 to get $1,000,000. The next step is comparing the premiums for different term life insurance policies for that amount. Life insurance policies that accrue cash value are generally not considered good investments, and some financial advisors suggest taking out a term policy, and investing the difference in premiums between the term policy and what the premium would be for an investment life insurance policy. That would allow for affordable premiums, plus investment income.
