5-Minute Fix: Do You Have Enough Life Insurance?

young family life insuranceNo one really wants to buy life insurance. But we probably all understand how it’s often the only way to protect our loved ones if we die too early.

Here are the simple facts:

Most people in this country are uninsured. Three out of 10 people reportedly have no life insurance at all. And the average U.S. household only has enough life insurance to replace 3.5 years of income.

Do you need life insurance? And how much is enough?

Here’s the easiest way to tell if you need life insurance:

If someone else depends on your income (for example, a spouse, partner, child or parent), you should be covered by life insurance.

A good rule of thumb is that insurance should replace seven to ten years of income, or even more if you can afford it. That’s especially important in today’s financial environment.

Just imagine the situation of a young couple with two small children where the husband works and the wife stays at home. The husband has a $75,000 salary, which supports the family.

If the husband dies prematurely, his salary will be lost.  If our couple has only the “average” life insurance coverage of  3.5 years of income, the widow will receive $262,500 in life insurance benefits.

Does that sound like a lot? Let’s say the widow starts spending it down to pay living expenses.  After all, the family has lost the husband’s salary – the main source of income – but still has to pay the bills.  The money will be depleted in a few years; after all, it replaced less than four years of salary.

Or let’s say the widow invests the money and withdraws only 5% of the amount each year, to preserve the principal (today’s low interest rates certainly don’t help).  That’s a good idea, but gives her only $13,125 of  income to live on each year, which clearly isn’t enough.

She may go back to work full-time, but her earning potential may be limited if she’s been out of the workforce for some time (and again, the tough job market complicates things).  Plus, now she’ll incur childcare expenses, which will cut into her earnings.

To cover her annual expenses, she may decide to draw more than 5% from her insurance nest egg, meaning her capital will diminish more quickly. And that still doesn’t solve the problem of how to come up with the “extra” money needed to pay down the mortgage, cover future college expenses, or fund her own retirement.

Let’s hope by now you see why you need 7 to 10 times your salary in life insurance coverage, if indeed you have dependents to support.

And now for the good news….

Here’s the really good news.  For most people, term life insurance is very inexpensive, meaning you should be able to afford the coverage you need for as long as you really need it.

Believe it or not, term life insurance is cheaper now than it was several years ago.

“Term insurance rates are half as expensive as they were 20 years ago and 10% less than they were 10 years ago because of longer life expectancies, medical advancements and improved underwriting standards, ” writes financial reporter Alan Lavine.

So take a moment to review your own life insurance needs.  Do you need life insurance to protect someone you care about?  Is your coverage high enough? If not, it may cost you only a dollar or two a day to bring your coverage up to par.

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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