As a parent, one of the scariest things to think about is what your children will do if something happens to you someday. This can be even scarier if you’re a single parent without a partner to fall back on.
But here’s the thing: you are the sole provider for your children. It’s even more important that you take time to consider all the future possibilities. Here’s what you need to know about life insurance, including how much coverage to get and how much it’s likely to cost.
How Much Coverage Do You Need?
The biggest life insurance question is usually about how much coverage you need. There are all sorts of rules of thumb for this issue. Some say you need seven times your current annual income, while others say more or less.
But how much coverage you need really depends on how the benefit would need to be used if you were to pass away. Ultimately, this depends on a few factors, including the following:
- How old your children are right now
- Who would care for them if you were to pass away
- What that caregiver would need to be able to care for your children
- How much debt you currently have
- Whether or not you want to pay for your children’s college costs
Let’s break this down, then, into the five things you’ll need to consider to get the most out of your life insurance policy.
1. Talk to Potential Caregivers
If you don’t already have plans for alternative caregivers for your children, now is the time to make them. Your life insurance decisions will largely hinge on the circumstances of those who would care for your children in the event of your death.
For instance, let’s say you have four kids who would live with your parents if you passed away. If your parents have already downsized into a retirement home, they’d probably need to move to care for your children. In this case, you need to account for their additional moving and housing expenses in your life insurance policy. If they’ve already retired, you may need to consider the other ways that caring for your children would impact their ability to cover their own living expenses.
But what if you have only one child who would move in with family friends if you passed away? If your friends already have a few kids of their own, they may not need to move or add on to their home to accommodate your child. In this case, you may not need quite as much life insurance coverage.
It’s a good idea to have an up-front conversation with potential caregivers. What would they need in order to care for your children appropriately? These are difficult conversations to have, but they’re an essential part of this equation.
2. Think about Your Kids’ Needs
How much insurance you require also depends on your kids’ ages and needs. If you have younger children, you’ll need more coverage—and you’ll need it to last longer. If your kids are older, though, you can probably purchase a shorter policy with less coverage.
Beyond just their ages, you’ll want to consider your kids’ particular needs as well. Are they currently attending a private school that you’d want them to continue attending? Or maybe you have a child with special medical needs. Make sure your policy is large enough to cover those costs.
If you want to fund your children’s college attendance with your death benefit, you’ll need quite a bit more coverage. If you can’t afford to cover college tuition right now, you could also look at college funds as the icing on the cake. In a couple of years, if you’re in a better place, consider upping your policy or adding a second one to cover these costs.
3. Consider Your Current Financial Situation
Even those without children should have enough life insurance coverage to tackle leftover debts and other end-of-life expenses, but it can be even more important for single parents. You’ll want to be sure your children aren’t dealing with a burden of debt while also grieving your loss. If possible, you’ll want to cover the full amount of your debt so they don’t need to.
Keep in mind the costs of end-of-life services, like a funeral service and burial, as well. These can run as much as $10,000 and be a real financial burden if you forget to plan for them yourself.
4. Add It All Up, and See What You Need
Now it’s time to determine how much total life insurance coverage you need. Here’s an example, based on the recommendation that you cover seven times your annual salary.
Sherry is a single mom of a four-year-old and a ten-year-old. She makes about $40,000 per year. If she passed away, her parents would care for the kids, and they’d need to move into a larger home to do so. She has about $25,000 in debt, outside of her mortgage, and she would want to fund both kids’ college funds with her life insurance. Here’s where she stands:
- Income Replacement: $280,000
- Additional Housing Costs: $50,000
- Debt: $25,000
- End of Life Expenses: $10,000
- College Funds: $200,000
- Total Life Insurance Needs: $565,000
That sounds like a lot, right? Before you decide you can’t afford insurance, though, take the next step.
5. Check Out Term Life Insurance Coverage
Over half a million dollars in life insurance coverage seems like a lot, but many people actually overestimate the actual costs of such insurance, especially for healthy, relatively young individuals.
The key is to get term insurance (unless you have a good reason to have more expensive whole life insurance coverage) for only as long as you need it. The longer your term, the more expensive your coverage. Sherry should probably have a 15-year policy, which would cover her until her children are both adults. And if Sherry is in good health, a policy like this could cost well under $50 per month. That’s much better, right?
Once you know how much coverage you need, it’s time to shop around. Plenty of online quoting systems can get you an estimate on your costs in just a few minutes.
These steps aren’t fun to think about. But having an affordable life insurance policy you know will protect your loved ones is worth a bit of discomfort. Check out our Personal Finance Learning Center to ensure you’re on the right track to keep your children safe and secure when you’re no longer here.
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