We’re fortunate to count several young couples among our clients, and not surprisingly, there’s often happy news of a baby on the way.
It’s a hectic time for these young adults. They’re building careers, buying new homes, becoming parents, planning for college expenses down the road, contributing to their own 401(k)s, and trying to keep up with all the personal and financial responsibilities of a growing family.
In fact, they’re often so busy that they overlook the obvious. And that’s where we come in. As financial planners, we need to remind them to protect what’s most precious.
Protecting a growing family
The one thing these young families need, and often forget, is adequate life insurance. A good rule of thumb is that you need seven to ten times your income in life insurance if you have dependents who would be harmed by your premature death.
So if your salary is $100,000 per year, you might need about $1,000,000 in life insurance. That may seem like a lot, but it really isn’t.
Your family probably depends on your salary to pay the mortgage and household expenses, build up assets for retirement, and cover future college costs. And at today’s low interest rates, that $1,000,000 death benefit might only provide $40,000 of steady, annual income to your beneficiary. As you can see, that doesn’t even come close to fully replacing your $100,000 salary each and every year.
Term life – the most coverage at the lowest cost
Here’s the good news. For young people in good health, term insurance is inexpensive and easy to obtain. You can purchase a term policy that will lock in the premium and death benefit, with no future increases in price, for twenty or even thirty years. For most couples, that covers their child-rearing years up through college graduation, the time period when they desperately need plentiful life insurance to protect their family.
The cost is usually only a couple of hundred dollars per year (men’s premiums are slightly higher than women’s), meaning you get a lot of bang for your buck. Term life insurance costs have actually come down over time, due to longer lifespans and medical advances. “Today’s term insurance rates are 50 percent less than they were 20 years ago,” says financial writer Alan Lavine in Wealth Management magazine.
We don’t usually recommend permanent, or cash value, life insurance for young families. It’s much more expensive than term, and few young people can afford to buy the coverage they really need. And inevitably, several years down the road, they grow dissatisfied with the policies. They look at how much they’ve paid in over the years through premiums, and how little the policies have grow, and conclude they’ve made a bad investment.
The Takeaway: Most of the young families we talk to have life insurance coverage that’s way too skimpy (usually only one year’s salary purchased through work). For most people, term life can be a quick, easy and inexpensive fix. Whatever you do, don’t procrastinate. Get new coverage in place and check this item off of your “to do” list.