August 20, 2015
A new survey makes me sad, mad and very nervous. According to Bankrate.com, 37% of parents with children under the age of 18 have no life insurance. And even the parents with life insurance aren’t really protecting their family, as one-third have policies with death benefits that do not exceed $100,000. That may sound like a lot of money, but it’s woefully little once you sit down and run the numbers.
I am going to be blunt: There is no way you can tell me you love your kids more than anything if you don’t have life insurance. That’s not just some odd disconnect. It is dangerous. And it’s your kids’ future you are putting in danger.
Here's how to get over your life insurance phobia and protect your family:
Step 1: Acknowledge it is financially irresponsible to not have life insurance if there is anyone dependent on your income. And let’s be clear: any young child is dependent on you. In fact, if your intention is to help a child attend college, you need to think about protecting them through age 22.
Extra tip: Stay at home parents need to have life insurance on their life as well. Just imagine how your family would operate if the stay-at-home parent died. Chances are the remaining parent would need a whole lot of support, and while family and friends may step in for a good chunk of the help, it’s smart to assume that the surviving spouse would also hire some help as well.
Step 2: Calculate your dependents annual income needs. Multiply that sum by at least 20. Carefully think through how much money your family would need to maintain their standard of living, if an income-earner dies. I want you to multiply that amount by at least 20, to get what your target death benefit should be. That is the sum your heirs will receive if you die while the policy is in force. Why 20x? Because I want your family to be able to invest the money conservatively--say in high quality municipal bonds--and live off of the principal. And if a goal is to help pay for a young child’s future college costs, that too needs to be factored into this calculation.
Step 3: Relax, a large death benefit does not mean a huge premium. Don’t freak out about the 20x rule. Yes, if your family would need $70,000 a year if you died, that works out to a big death benefit of $1.4 million. But stick with me here, this isn’t going to break the bank. If your goal is to protect young children until they are independent adults, you only need to purchase what is called term life insurance. The term is the number of years the policy will remain in force. That can be 10 years, 20 years, or more. If you die while the policy is in force, your heirs receive the death benefit. After the term expires, so too does the policy. Because the odds are high that you will in fact live past when the term expires, these policies are much less expensive than “permanent” life insurance policies that never expire. For example, a 35-year-old male in good health will likely pay less than $170 a month for a 20-year term life policy with a $1.4 million death benefit.
Step 4: Shop online for a guaranteed level term policy. With a level term policy your annual premium will never change—it is level throughout every year. I think that’s the smartest way to go, so you don’t ever get hit with any adjustments. The teams at SelectQuote.com and AccuQuote.com work with a variety of financially strong life insurance companies, and will help you work through the right death benefit needs for your family.