About a year and a half ago, I wrote about how we decided on our life insurance needs. Recently, Neal mentioned that he has re-evaluated his own life insurance needs, and now we’re thinking about modifying our coverage as our circumstances have changed.
The fact that we’re expecting a baby this summer has encouraged us to take another look at our finances. This includes re-examining our life insurance coverage.
Analyze your financial needs carefully
Here are some questions you have to tackle in order to figure out how much life insurance you need.
- How much will your funeral cost?
- How much support will your dependents need?
- How long will they need this level of support?
- Do you have any one-time obligations, such as a mortgage payoff?
These are the same questions that we faced a year and a half ago, but some of the answers have changed. For example, with a child in the equation, we’ll definitely need dependent support.
The rule of thumb we’ve found is to multiply the deceased spouse’s income by 10 to get a ballpark estimate of necessary coverage, which would definitely require an increase in our coverage. As of right now, we really only have enough to pay off our mortgage and student loan debt with our term life insurance policy.
Listing our debts and final expenses
My husband and I both agree that, at a minimum, our life insurance coverage needs to be enough to pay off all of our existing debts and take care of our final expenses. We believe that being debt free will be a huge relief to the surviving members of the family. Right now our two debts are:
- Student loan: $21,000
- Mortgage: $112, 000
That gives us a total of $133,000 of debt that we would like to pay off. For funeral costs, we’re going higher than average and estimating $15,000. That means the absolute minimum that our life insurance policy should cover is $148,000. Our current coverage will address these basics, but there’s noting left over for ongoing support.
Figuring out how much support we’ll need
Once we’ve taken care of our remaining debts, our next topic to discuss was how much support we’d like to leave behind to the survivors. Instead of just factoring 10x the lost income of one of us, we’re looking at enough to cover about three years of lost income. That would give us a financial buffer so the grieving spouse can decide how to handle day-to-day expenses. Once our debts are paid off, that three years of income would go much further, hopefully further reducing the stress.
With one remaining spouse, another item that we need to consider is childcare expenses. While family and friends will no doubt help out as best they can, we can’t expect them to do so forever. We’ll thus need to have a system in place to help with the transition. Looking at childcare expenses in our area, we’ve estimated that we’ll need around $1,000/month. We’re including enough in our insurance to cover three years of childcare. Whatever we don’t use can be redirected to other expenses or possible savings for future use.
Shopping around for life insurance quotes
Once we knew roughly how much insurance we’d need, our next step was to start shopping around for policies. I actually do this on an annual basis – every time we get a payment notice, I take a quick look around to see if we can get a better deal. While you can hit a bunch of individual company websites, it’s far easier to get life insurance quotes from an aggregator, such as Insure.com.
By shopping around with multiple companies, you can get a sense for typical prices and make sure you’re getting the best deal. You should also be sure to check out our tips for saving money on life insurance.
After running the numbers, we’ve decided to hold off a bit and continue shopping around before increasing our life insurance coverage. Next week, I’ll be contacting our current insurance agent and seeing if they can offer a competitive quote for the amount of coverage we’re looking for. If they can, even if it’s a few dollars more, we’ll probably stay with our current company. However, if we can find a substantially better deal with another reputable company, we’ll go ahead and make the switch.
We sincerely hope we won’t have to use this life insurance policy in the future, but having it will give us peace of mind that our family will be financially taken care of if anything happens to one of us.
Your thoughts on life insurance coverage
I know that many of you have thought about this long and hard about your life insurance coverage, so I’d love to hear your thoughts on the topic. Do you have a life insurance policy in place? Why or why not? If you do, what kind of policy did you get, and how much coverage did you sign up for? How did you determine the right amount for your family? And have you changed your coverage level over the life of your policy?