• Alex Mizerski

Life insurance for parents: what you must know

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Life insurance can be tough to understand. I know my wife and I had a really hard time sifting through all the options and finding the right one for us. Life insurance for parents is really important and not something to be overlooked.


I've talked about the idea of psychological safety when having an emergency fund. Well, having life insurance is another step, another safety net, that provides even more psychological safety in the case of a family tragedy.


Understanding life insurance can be tricky, but I'm here to try and smooth that out and answer a ton of questions you may have about when you should get life insurance, how much insurance to get, what type is the best, and where to find the right life insurance provider.


When should I get life insurance?

This isn't a straightforward question. The answer can vary depending on your personal situation. As a general rule of thumb I would suggest anyone who is married, or in a long-term relationship where they want their partner to have some financial security (beyond what your savings can support) should look into buying life insurance. For some, this happens earlier in life than for others. No matter when this happens for you it is important to ensure the financial safety of those who share finances with you or rely on your income to pay the bills.


Typically, as you get older, life insurance becomes more expensive. That is because of the math behind the cost of life insurance. Basically, as you get older, you become more likely to die. The more likely you are to die, the more expensive it will be to insure you because there is a better chance your life insurance provider will have to pay out whatever amount of life insurance you have signed up for.


A few examples to highlight who might/might not need life insurance:

  • You are 22, single, and just graduated from college, you probably don't need life insurance

  • You are 32, single, you probably don't need life insurance

  • You are 32 and have a child, you should have life insurance

  • You are 42 and single, you probably don't need life insurance

  • You are 42, married, you both have jobs and have 1-7 kids (or more), you should have life insurance

  • You are 42, married, you or your spouse is the sole breadwinner, and have 1-7 kids (or more), you should have life insurance

I tried to illustrate a wide array of examples for you to draw from (if you aren't sure just email me and I'll talk you through it, alex@dollarsavingdude.com).


How much life insurance do you need?

This should be the first question to ask yourself when seeking out life insurance. Immediately after determining that you need life insurance, you should determine how much you need. To figure this out there are a few schools of thought 1) income replacement 2) debt elimination or DIME 3) 10-15x salary (plus $100k for each child)


Income replacement

This is a case of the term basically defining itself. To summarize, you want to buy enough insurance to replace your income. Let's use an example to illustrate:


John makes $75,000 per year and wants his family to be able to live off that income for 15 years after his death. So 75,000 x 15 = $1,125,000 is the amount of life insurance John needs.


In this example John and his family have a large amount of life insurance should John pass. They can have their financial advisor invest this money, earn 6% annually, and potentially make this last longer than 15 years. Or, they can use some of the money to pay off the debt they may have.


Debt Elimination

Again we will provide an example to help illustrate this school of thought. John and Brenda have $225,000 in debt between their mortgage, cars, student loans, and credit card debt. They also make $150,000 between the two of them annually ($75,000 each). They have no children and want their insurance to cover 5 years of income. So 225,000 + (75000 * 5) = $600,000 in life insurance for each of them.


In this second example, the only purpose of life insurance is to eliminate any outstanding debt the family may have and have a few extra years of income to live off of. This example is more typical of a younger family with only a single person relying on another's income. If all debt is eliminated, then the other individual should be able to cover the remaining expenses with their own wages and have a healthy amount of money for retirement with the extra years in wages.


10-15x Salary

This is very basic, for each person with life insurance, you take their annual salary times 10 or 15, depending on how much of a cushion you want to get the amount of life insurance you need.


For example, John makes $75,000/year and Brenda makes $75,000/year. They prefer to have 15x their salary should the other pass away so they each have a life insurance policy worth $1,125,000. For each child they have you would add $100,000 to the policy. Typically, this additional $100,000 is to pay for college or other expenses after a child leaves the home.



What are the different types of life insurance?

Term - This type of life insurance will pay your beneficiaries a pre-determined amount (whatever you agree to with your insurance agent) within a pre-determined time frame. For example, you can have a $250,000 Term Life Insurance plan that lasts 30 years. Over the course of 30 years, you make a monthly/yearly payment, and should you pass within that time frame your beneficiaries will receive $250,000. The payout amount and time frame can vary, but that will have an impact on your payments.


Whole Life - Similar to term life insurance, whole life provides your beneficiaries with a payout should you pass. The key difference is that whole life lasts your whole life, no matter how long you live, and term only lasts a predetermined length. Another key difference between term life insurance and whole life insurance is the cost, whole life can be 5x to 15x the cost of term insurance.


Where do I go to get life insurance?

You should start with your employer, then check with your insurance agent, then go shopping around.


Typically, an employer will be able to offer the lowest rate to you, but generally, this is limited to your annual salary, or 2x your annual salary. That is why some should be reaching out to their present insurer. If you have auto or some other type of insurance through someone you trust they can guide you toward the right life insurance for your situation.


If you need more insurance than your employer can offer (or they don't have competitive rates) and your current insurer has limited offerings google life insurance and take your pick. There are a ton of reputable companies out there offering highly competitive rates in life insurance.


Summary

Determining when to get life insurance can be hard, but I've tried to make it easier above my using real-world examples. If you still have questions, email me at alex@dollarsavingdude.com and I'll answer every question that I can.


Good luck and go get life insurance (if the time is right for you!)!





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