For the young family, accumulating debt seems to be as normal as having children. It makes very good sense that as the family grows, so does the debt. Very few 25 to 35-year-olds are concerned about the amount of debt they carry until the time comes when they cannot possibly pay it. Usually, this happens when a family breadwinner becomes disabled or dies unexpectedly.
The spouses are typically concerned enough to insure their home against damage or destruction, and, of course, the family autos must be protected, but in most cases, there’s no choice in the matter since the home and vehicles are collateralized. Lenders certainly don’t care who you buy your insurance from, as long as you buy it to protect the collateralized property. The bottom line is quite simple; you have debt and a lot of it. What are your survivors going to do if you’re no longer in the picture?
How much insurance is enough?
This is that the $64,000 question that many consumers fail to get answered before making an insurance purchase. Yes, having insurance is important and yes, you need to make sure that your loved ones are not saddled with your debt when you’re gone. But buying insurance that “sounds about right” could easily leave your surviving loved ones wondering how the heck the family is going to stay in the house, pay the bills, go to college, and even pay for your funeral.
Life Insurance Needs Analysis
The most appropriate way to determine how much life insurance you need to protect your surviving loved ones is to conduct a needs analysis. You can do this on your own by using an online program that many of the insurers, such as Prudential or Sun Life Financial offer on their websites. This needs analysis will take into consideration all of your financial data and establish the amount of insurance that would offer the best protection for you at that time in your life:
- Your Savings and other assets
- Business assets
- Mortgage balance, vehicle loans, and personal loans
- Monthly living expenses (over a selected time period)
- Funds needed for education expenses
- Credit card debt
- Final expenses
- Financial gifts to your survivors
- Current Income
- Current insurance in force
After this data is entered into the program, the total amount of insurance needed will be calculated and therefore used as a goal for protection. You will then know how much insurance you need to purchase at that time in your life.
Although your needs analysis can be determined on your own, it makes better sense to rely on the advice of an experienced and reputable agent or broker to work with you. Since the analysis is for the current position you and your family are in, it makes even more sense to rely on an insurance professional so that the two of you can revisit your needs analysis each year or so going forward. You need to accommodate for life change events and your agent will keep you on track.
The Affordable Solution
At this point, you probably already imagine that the final number delivered by your needs analysis is going to be quite large, and you may not be able to afford the insurance premium. The good news is that Term Life is more affordable today than ever before. Even if you cannot take care of the entire amount of insurance you need now, you can probably handle most of it and then add later as your financial position improves. Using a 20 year term policy makes a lot of sense because it is very affordable and in most cases, the company has a conversion privilege available so that you can convert some or all of the death benefit to a permanent policy before the 20 year period is concluded. This privilege is especially important because after 20 years or so you will have most likely reduced your debt and gotten the kids into college and may not need near as much insurance as you did when you started. You can convert the temporary insurance to permanent insurance for a lower face amount and not have to prove you are healthy!
The newer term products have even more great options that you want to consider:
- Additional Insured rider – this allows you to add an additional insured to your policy (like your spouse) for the same or lower death benefit.
- Child Term Rider – allow you to purchase a block of insurance (usually $5,000 to $25,000) to cover all of your children you have now or will have in the future.
- Waiver of Premium – this is a very good option that allows the insurance company to pay your periodic premium if you become disabled and cannot work.
- Accidental Death Benefit – this is a very inexpensive way to increase your death benefit if you die as a result of an accident. Typically the insurance company will double your death benefit for a very reasonable additional premium.
It’s important that everyone, whether single or in a family, purchase enough life insurance so that they do not pass along debt to their surviving loved ones. Someone has to pay for your funeral and other final expenses and that someone should be you. Term insurance is the most affordable way to accomplish this and there’s no time like the present to get started.