Life Insurance Considerations in a Changing Economy

Last week, the Bureau of Labor Statistics released the results of their annual study on families and how they’re doing economically. It wasn’t great news! Average household income for 2012 to 2013 is down by $103 to $65,069 before taxes, but their expenses increased by $777 a year to $51,408. Contributing the most to the increase in expenses were transportation costs ($8,999 a year on average) and kids. The average cash contributions category (alimony, child support, sending money to kids) was up to $1,949 a year which does not include costs to house, educate, feed, or clothe your child.

These numbers paint an interesting picture of how well we’re doing; we’re making less and spending more. They also raise some interesting considerations when evaluating life insurance. Whenever I discuss life insurance with anyone, I ask them to answer three questions:

  • What do you want the money to do?
  • How much will that take?
  • What will the budget afford?

Most people have a good idea of what they want the money to do. Common answers include pay off the mortgage for the home so their family will have a place to live, pay for college, provide for lost income, etc. The question most people have a difficult time with is the second one, how much money will it take to do that? What I’m noticing is most people are severely underestimating the amount of money it will take to accomplish their goals for their life insurance policy.

For illustration purposes, consider the following three cost categories:

  • The average new car cost
  • The cost to raise a child over 18 years
  • Higher education cost

The average cost for a new car today is a little over $32,000. I have not been able to find projections for what the average cost of a new car will be in 2020 or 2025, but it isn’t going to get any cheaper. Costs should continue to rise based on the amount of safety equipment being added (optionally and required) to new vehicles. In addition, auto makers are moving toward new lighter weight materials that cost more than steel in order to meet the fuel economy standards that go into effect by 2025 (average fuel economy of 54.5 MPG). Cars and trucks are going to get more expensive.

The cost to raise a child to the age of 18 keeps going up. The US national average is $241,080, unless you live in the northeast, in which case, you’ll pay $446,100 on average. If you want to provide a college education for your child you can expect to pay between $41,000 and $82,000 for the freshman year in 2025. In 2031, the cost of a four year degree will be an average of $353,000. These figures alone put the total cost of raising a child from birth to age 18 and paying for their college education close to $600,000 per child.

Most people aren’t getting enough life insurance to fully meet the goals they have for a life policy. I do believe part of the solution is buying more coverage, however, I also believe that families really need to understand the true cost of achieving their financial goals. It will mean developing a lifelong financial plan which addresses savings, avoiding debt, and investments in addition to having the right amount of life insurance as a backstop if something doesn’t go according to plan.

How are you approaching this? Share your thoughts, suggestions, and questions with me in the comments section of our blog or on our Google + and Facebook pages. I’d love to hear from you!

Evie Wise
Evie Wise


Evie Wise
Evie Wise

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