May 16, 2008

How much life insurance do you need?

The sudden death of my friend J.'s husband a couple of days ago has got me thinking about life insurance again, and specifically, whether Marc and I each have enough coverage. As much I hate paying the premiums, thinking about how much worse J.'s situation would be if her husband didn't have adequate life insurance is making me wonder if we should add a policy.

But how do you decide how much life insurance is enough?

I remember struggling with this question after Alex was born. I knew Marc and I needed to purchase additional policies (we already had policies that we'd purchased after we bought our house) but I wasn't sure how much coverage to add. I used various online calculators, but I felt the same way about them as I do about retirement calculators: there are too many uncertain variables.

For instance, perhaps our biggest expense in the next 15 to 20 years will be paying for a private school education for the boys. (We might still send them to public school, but I have a lot to learn about the exemption system in LAUSD before we make a final decision.) The calculators take college expenses into account, but not private primary and secondary education expenses. That's not really a problem, since there's almost always a miscellaneous expense category, or the expense can be added into college expenses. The real problem is that it's hard to predict how much private school tuition will run 10 years from now. It's equally difficult to predict how high college expenses will be in 15 to 20 years.

If I assume that tuition will increase at 6% per year, a top private school will cost nearly $480,000 by the time Alex graduates from high school. A less expensive but still reputable private school will cost nearly $200,000. If Alex were to attend USC, says it will cost $524,000 without aid. Attending UCLA will still cost over $250,000. So we're talking anywhere from $450,000 to $1 million just for educational expenses for each child. Probably. (I figure if the kids have lost a parent, the least we can do for everyone is eliminate these expenses as a source of stress and worry.) At this point, before our oldest has even started kindergarten, it's simply impossible to know which number is more realistic. For me, this kind of uncertainty is what makes life insurance calculations so difficult. (Ditto for retirement calculations.)

Another equally important and yet tenuous area of calculations is living expenses. How do you estimate your living expenses for 10 or 20 years from now? The calculators require you to input your current living expenses, and then use a formula to project expenses. But a family's expenses change through the years. Right now we pay for daycare and an occasional activity. But in a few years, we'll probably be paying for private school, sports teams participation and maybe lessons of some sort. I'm expecting our living expenses to rise considerably in approximately three years, when both boys are in school and participating in organized sports/activities, yet it's hard to predict exactly how much those things will cost. Or what if we decide to move? The mortgage, insurance, taxes and utilities would all change. But all I can do is guesstimate.

And that's really what it comes down to - your best guesses.

In the end, the best way to figure out how much life insurance you need is to come up with a range based on your best guesses. And then try to buy as much life insurance as you can afford.

One thing to note is that if your children are very young, a typical 20-year term policy may expire before your child's school years are over. You may want to consider a 25-year policy instead.

Life insurance, like wills, is one of those topics that's no fun to think about but absolutely necessary to have. Especially if you have family counting on you. Just think of what life would be like for them if you didn't have life insurance. That should be all the motivation you need to make sure you get those policies in place . . . before it's too late.


Anonymous said...

It is quite a scary thought isn't it. I have toddlers and the only insurance we have will pay off the mortgage. Our bills are high and if one of us was left a single parent, I doubt we could afford to keep living here. If the children were left with no parents, I am sure their grandparents could afford to keep them, but is that fair? Should we get some insurance in case that happens or just keep on investing and hope that money is enough?

Sincerely Yours said...

I know we need to add to what we already have. We haven't increased our life insurance since we had our second child. I thought it wasn't enough before and now I am sure it isn't. Thanks for the reminder on this subject. It isn't fun to think about but I know that we need to. Another very helpful post!

Sincerely Yours said...
This comment has been removed by the author.
Anonymous said...

I was the only one to have life insurance until about a month ago. My husband had it through his work but we realized it was not enough. So we also have private insurance for him now. We each have enough that would cover any and all debts and there would still be some leftover.

Personally, as much as I would love to fund my kids college education, it doesn't seem like it is going to be a possibility when college is going to cost $200-$500 grand a year.

Make sure that if your husband/wife has it through work that you know the terms, amount, etc. You may think it is enough, but it may not be even close.

Chief Family Officer said...

@Rachel - You bring up a good point, and I'll probably raise this in a future post. I was just telling a friend yesterday that even though our parents could afford to take care of our child, I wouldn't want the surviving spouse to have to fight with the grandparents over money, nor would I want the grandparents to argue with each other over money. I think the responsible thing to do is to have enough insurance to provide for as much as possible.

@Sincerely Yours - You're welcome, and thank you for your kind comment. I hope the process of getting additional insurance is easy for you!

@Jennifer - Excellent point. I wasn't clear if you were referring to insurance in relation to paying for college, but just to be clear, I'm not sure that we'll be able to afford to pay for the kids' entire college education, nor am I sure that I would even if I could, as long as we are both alive. However, if one or both of us are gone, life is going to be hard enough without financial worries, and that's why I want to make sure we have plenty of insurance so that the money stuff, at least, is taken care of and the survivors can concentrate simply on healing.

Mrs. Accountability said...

I enjoyed your post - found your blog through the 153rd Carnival of Personal Finance. This was a good reminder for me. My mom is the beneficiary on my life insurance and since my husband and I are married again I need to get it changed into his name. Nice to meet you!

Anonymous said...

Good move with the life insurance. It is something you just have to do. My kids are 13 & 11 so, and financially we as a family are significantly better off than when they were born, so I see an end in sight. I will probably keep it through their college education.

Best Wishes,

Chief Family Officer said...

@Mrs A - Very nice to meet you, as well!

@D4L - I do think the calculations would be different if our kids were older - easier, even, since I wouldn't have to project so much! I personally agree with you that it would be wise to keep the policies til after the kids are out of school - if something happened to one of you while they were in college, at least money (or lack thereof) wouldn't be a cause of stress nor would it derail graduation.

Anonymous said...

Remember, Social Security will pay your spouse and children your benefits up to 180%. In my current situation, that is $3600 per month. With my youngest being 10, That only lasts 8 years. I expect my wife to be earning more every year, but a big issue is health insurance. She will have to work just for insurance. Longterm, its the cold hard truth that the only way I can afford to send my 4 children to college is to die. So I don't really figure that into my insurance needs. They have enough time to pay off their won school loans.

Denise said...

Another option you could look into would be a child term life insurance policy. While there maybe no need for income replacement when it comes to the death of a child, funeral expenses and counseling for grief stricken parents and family can be handled with the death benefits from such insurance. Whole life insurance policies are also often sold as savings for your child’s future. While the cash benefits from such policies are not staggering, it is often better to invest in them, than not at all. An affordable life insurance policy is therefore highly recommended for your children. When they are young and healthy it is always easier to get a policy at a cheaper rate and with more ease. In the event of any illness later in life will not prove to be a hindrance in qualifying for a reasonably prices life insurance policy.
Denise at AccuQuote