Life insurance is usually a downer of a subject, so I'm going to try to avoid that here. Today is the kickoff of the Life Insurance Movement, with the goal of bringing more awareness to this financial issue that people shouldn't neglect. Plus, life insurance is such a difficult financial product to purchase because it is typically sold by salesmen who earn huge commissions by putting you into products that you may not need.
But like the title says, young families need life insurance more than anyone else, and here's why, along with a few things to remember!
Life Insurance for Young Families
Life insurance is probably the most valuable financial product that a young family can buy. Why? Because life insurance is designed to provide financially should something happen to you or your spouse.
For example, if the husband works and makes $75,000 per year, and the wife stays at home, what happens to the wife and children if the husband dies unexpectedly? Who is going to pay the bills? What about time to grieve? All of these things need to be planned for, and unless you have a gigantic emergency fund, life insurance is probably a good option.
And it is much more important when you're young for several reasons:
- This is usually your asset accumulation phase in life, and an unexpected death can really damage this.
- This is also the period of time when debts are highest (mortgage, student loans, etc.) and the bills will keep coming no matter what.
- Children are expensive! And education continues to get more and more expensive over time.
Plus, insurance is also usually cheaper to get when you're young, because you are healthier and will live longer!
What Type of Life Insurance to Get
If you have a young family, I'm a strong believer in getting a simple level term life insurance policy. This is one of the simplest forms of life insurance: you just pick a length of time, a death benefit, and the premium is level through the policy. This is a great option for young families because:
- You can pick a time duration that meets you needs (i.e. when you plan to retire or when your kids are done with college)
- You can choose a death benefit that meets your needs
- The level term premium is usually pretty cheap
When deciding on what term length to consider, think about how long you'll need coverage. You usually just need to get through the accumulation phase in life, and make sure that your children get through school. For most people, this is usually around 50-55, but it could be later. If you're a young family, this typically means a 20 or 30 year life insurance policy, which is pretty standard.
Next comes the death benefit, or the payout amount if you die. This is a little harder to figure out, but I like to use this reasoning: 10 times your annual salary plus the value of any debts you have. Going back to the original example, this would equate to $750,000 + debts (say $250,000 for a home mortgage), which would be a $1,000,000 policy. This tends to work because you can make sure that your family can live debt free, and then live off the income from investing the remaining proceeds from the insurance. It is also important to remember that this is the total amount of insurance to get, and many people get insurance through their employer, which may offset this amount. However, don't solely depend on your employer for insurance in case you lose your job.
Don't forget though, that life insurance purchases should come after having health insurance. You need to take care of your needs today before you plan for the future.
What are your thoughts on life insurance?
Term life makes sense for young families. In general the goal should be to minimize premiums though. So I think it usually makes sense only to carry insurance on the primary wage earner. A reasonable amount would be expected salary until your youngest child hits 22. This suggests that the desired amount will drop as you age.
Of course, the more earning potential each spouse has and the more money you have in the bank, the less you need.
Right, and hopefully as you get older, you have more money in the bank and have less of a need for life insurance.
Great tips and knowledge on life insurance. I believe life insurance is absolutely necessary if (1) you have dependents, (2) if you’re married, (3) want to leave an inheritance to somebody upon your death, or (4) have no savings or assets to pay for your burial upon death.
To be fair, I sell life insurance and I’ll gladly dispel the notion that we “earn huge commissions.” That may be the case for larger policies that are universal, variable, or whole life. However, for term life that’s simply not the case. For instance my wife’s term life policy is for $650,000 and she pays $240/year. The commission on that is roughly a whopping $170. Sure, it’s a large amount of the 1st-year premium but very few people are getting rich selling term life policies.
Thanks for dispelling the myth about commissions – but I also know for a fact that there are insurance brokers out there that do steer customers into universal or variable policies for the commissions, because I interned for one in college and was kind of disgusted at that fact once I figured it out.
I also don’t think $20/mo is that bad of a premium for that amount of insurance.
One of my good friends dads was just diagnosed with lung cancer. He is 47 and has a year to live and he never even smoked cigarettes. I’m learning about the importance of life insurance!
Chase
I’m sorry to hear about that – but it goes to show that random events can strike at any time and that is why it is important to be prepared.
Part of our financial plan, once we made one, was life insurance.
Knowing we were going to try to become parents in the near future was a critical kick in the pants to making sure we had enough TERM life insurance to pay off the mortgage, debts (long gone) and ensure that the folks we chose as god parents for our son would have a good chunk of money to ensure lil’ SPF had all he might need if we were no longer around.
Great topic. I struggled to think of one for our site but this would have been a fitting topic. You did a great job covering it.
I’m glad you thought of it now, and not later. I feel like too many people fall into the trap of not thinking they need it until it is too late!
Life insurance provides that peace of mind and for young families it’s important they don’t by pass this important aspect of their financial plan
Or not wait until it is too late!
We approached the same topic from different viewpoints. I really like your post and have linked to it from mine so my readers will benefit from your advice as well. 🙂
Life insurance is so important! My wife and I have enough to pay off the debts and float the other for a while in the case of the worst. We are very close to two young families to whom the worst did happen, and they weren’t prepared. It is heartbreaking to see a young family go through the loss of a parent and financial ruin at the same time. It is such a small expense to prevent something horrible from happening.