I met with a young couple six months ago. They were expecting their first child and the husband wanted to talk about life insurance. The arrival of a child is a time when many couples explore life insurance and I was honored and delighted to be consulted to assist them.
One of the husband’s first questions was how much life insurance would he need. In order to answer this question, I outlined the three questions I believe anyone should answer when contemplating life insurance:
- What do you want the money to do
- How much will it take to do that
- What can your budget handle
He was able to answer the first question easily; he wanted it to do three things in the event he died before raising their child or children:
- Pay off the mortgage
- Replace lost income
- Provide for college
The desire to pay off the mortgage is a common objective many people have with the life insurance benefit. Both he and his wife work, however, the absence of his income would make it difficult for the wife and their child or children to remain in their current home. Having enough to pay off the mortgage would enable the family to remain in their home for as long as they want.
I wanted to make sure I understood what he meant by replacing lost income so I asked him to elaborate. His goal was not to replace his income forever, but rather to provide a buffer for a year or two for his wife to adjust to his loss. Having this kind of buffer allows a surviving spouse the time to grieve and begin the healing process. It also helps them avoid the pressure of making decisions in a moment where thinking can be hard for anyone and is clouded by fear and pain.
We then delved into what level of education they wanted to provide for their child or children. Did this mean providing a vocational education or attending a state or an Ivy League school? Each option carries a different cost and will determine part of the amount of coverage he needs. It’s also important to ask how many children they are thinking of having as that will be factored into the amount needed.
Once we had these answers, it was time to write down some preliminary figures. We reviewed the amount they owe on their current home and added to that figure two years of his current income. Both the husband and wife had attended Texas A&M University which is where they met. Their goal was to provide their children with that level of education regardless of which school was chosen.
While they haven’t finalized the number of children they’ll have, it may be more than one. That meant it was time to estimate the cost of that education looking 18 or so years into the future. He’d done some preliminary evaluation on the Texas websites and for initial quotes we used an estimated figure of $250,000 per child. We added the education portion for two children to our running tally including the home mortgage and two years of his income.
I followed this with what kind of a funeral he wanted. Most families are currently spending an average of $10,000 for a traditional funeral and between $2,500 and $5,000 for a cremation. We added that figure in with our current amount which provided us with an initial amount of coverage and the answer to the second question.
We then explored what they’d ideally like to spend for this insurance. In their case, they had a range in mind but weren’t sure if that was realistic or not. It’s always difficult to predict what a life insurance premium will be so I took that information and ran quotes for them to review. Given their age and the fact they are expecting their first child, I was able to recommend a 30 year term option that fit their budget and achieve their goals. This gives them one less thing to worry about while adapting to parenthood and enjoying their newborn.
If you’re beginning to evaluate your life insurance options, take the time to answer the three questions this couple answered. If you need help with this, let me know. Share your questions, comments, suggestions, and experiences with me on our Google + and Facebook pages, or in the comments section of our blog. I’d be honored to help in any way I can!