How much life insurance do I need? A common question asked by many young families.
Some people say that you should take ten times your annual income to calculate the policy amount. Some use other formulas to figure the number that best suits them.
Today I’d like to talk about the how much life insurance is adequate for a typical young family,
and I’ll give you some tools to logically calculate your own policy amount. First of all let describe the hypothetical family we want to work with. Let’s say you are a first time life insurance shopper in your late twenty’s, married, with a toddler and another child on the way. How much insurance do you believe is necessary in case tomorrow you don’t come home from work?
We should also say that you work hard for your $50K annual income and the monthly premium is a sensitive subject once all the other bills are paid. You have a mortgage of $350K and two vehicle loans totaling $30K conservatively. There is a small credit card with about $4000 on it and an old student loan with $10K left to be paid. This scenario is very common for most young families. At this point we have calculated up just under $395K of existing debt to be paid.
Now let’s identify what takes place over the next 3 years, a very limited forecast to show immediate needs. First things first, you need to be buried and your family would like a standard memorial service, $15K. Your spouse needs to replace your income for at least the next 2 years to raise the new baby, (assuming you’re the husband), and she could certainly use some help with the toddler once a week for the next twelve months until things adjust, $125K. Mom is smart and wants to start a small fund in each of the children’s names to start putting away for college, $10K each is a minimum should take them to any in-state school they need to go. With that it should grow to $50K by the time they reach age 20.
So now that we have discovered that a $500K policy can easily be spent and gone in less than one year on necessities alone, let me ask you again. How much life insurance do you really need? The reality is that no one wants to become super mom or super dad if their spouse passes away pre-maturely. To work full time and raise children is not anyone’s idea of a good time. Maintaining the quality of life you had while you were raising a family as a couple is what you should seek when deciding on a reasonable and adequate life insurance policy amount. Everyone’s numbers are different and there is no “cookie cutter” answer.
In the scenario I just described, I would recommend the client acquire at least a $650K policy in order to obtain a secure piece of mind for the family’s future. I really just wanted to write this in order to get you thinking of some of the numbers that become reality when a loved one passes away. This is one of the many conversations I have with my clients when they ask me for life insurance policies. If you would like to discuss how much insurance you feel is appropriate for you, or you would like to change the amount you currently have, please contact us.
