So your New Year's Resolution includes protecting your family with life insurance...congratulations! You're doing the right thing by insuring yourself and shielding the ones you love from a future of financial uncertainty.
To get you started on the path to a brighter financial future, there are 3 key questions to answer first:
1. How Much Cash Does My Family Need Now?
The point of life insurance is to help your family pay the bills while they transition into a life without you. Their most immediate concern is going to be paying for a funeral, plus the cost of any final medical expenses you may have. If you're thinking you can depend on Social Security, think again...a surviving spouse or child can only claim a maximum of $255.
- Funeral expenses. A traditional funeral costs anywhere from $8,000 to $10,000. There are a lot of hidden expenses here, including a fee for the funeral director, cost of embalming, cost of a casket, cost of a plot, and cost of a headstone. Even if you want the bare minimum of services, you can still expect your loved ones to have to pay $5,000 to $7,000.
- Final medical expenses. It's hard to estimate how much this could be when you don't know if you'll have any at all! According to LIMRA, however, 20% of people who lose a spouse to a terminal illness pay $10,000 or more in out-of-pocket medical costs.
2. How Much Income Will They Need Later?
Once your loved ones get past the immediate needs of paying for a funeral and handling any last medical expenses, they're going to face the full gamut of bills that won't stop coming just because you're not there. It's a good idea to plan out the cost of expenses like these:
- Mortgage. How much would it cost to pay off your current mortgage?
- Ongoing living expenses. This includes things like food, utilities, and transportation expenses.
- Other debt. This includes outstanding credit card bills, student loan bills, or other personal loans.
- Emergency fund. It's also a good idea to help your family build up an emergency fund that's enough to last a few months. This kind of cushion is especially helpful if your spouse (now a single parent) happens to be laid off or lose a job. That emergency fund could be the difference between a smooth transition and an unthinkable experience for your loved ones.
- Future expenses. Do you want to help your kids through college? If so, add approximately $14,000 (one year's tuition in a public college) for each child per year of college. This amount will definitely go up each year, so if your kids are years away from college, tack on 3% per year in inflation, minimum.
You're probably thinking that's a pretty hefty list of expenses! If it seems overwhelming now, imagine your spouse being faced with all those bills alone. Seeing that big list of expenses should reassure you that you're doing the right thing for your family.
3. How Much Life Insurance Do I Need?
Once you add up all the expenses listed above, you'll have a good idea of how much life insurance you need. Don't be surprised if all these expenses add up to several hundred thousand dollars. Some families need more than $1 million in coverage, while others need $200,000 or $400,000. It all depends on your outstanding debt, whether you want to help kids through college, and whether the insured spouse is the family breadwinner.