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Insurance > Life Insurance
How much life insurance do new parents need?
LISA SINGHANIA, AP Business Writer. Associated Press.
Copyright Associated Press
Q. My husband and I are about to start a family. Do we need life insurance? How much? And what kind?
A. The purpose of life insurance is to provide financial support for your dependents in the event of a death. Many new parents buy this type of policy to ensure that their children are provided for even in the worst-case scenario.
Financial planners say the first thing to do in shopping for life insurance is to evaluate your overall financial situation. Calculate your annual living expenses, including items like the mortgage and child care. Then take a bigger-picture look, and adjust those costs to reflect expenses that will come later on down the road, such as private schools or college education. The costs can be significant; some estimates place the cost of raising and educating a child through college at more than $700,000.
"Total up how much income the survivors would need and for how long and what other expenses there might be," said David Woods, president of the non-profit Life and Health Insurance Foundation for Education. "Subtract from that the assets that they may already have: Any savings, any other income or any Social Security benefits they would be entitled to."
The next step is to figure out how the death of a parent would affect those plans. For example, if one spouse is the primary breadwinner, assess how the family's income would be affected by his or her death. A spouse who stays home to raise children and take care of the house should also carry life insurance, since, at a minimum, child care and household expenses would increase.
There are several different life insurance calculators available online to help do the math, but in general a reasonable estimate is considered to be six or seven times the income being lost. So, if you make $50,000 a year, you might want to consider buying a policy between $300,000 and $350,000 for yourself. That may be too conservative, though, or too much, depending on your financial circumstances, so make sure to adjust that figure as necessary.
Your employer may offer a good deal on life insurance but, in the open market, experts say the best option for most people is term life insurance.
Term life insurance provides a specific benefit upon the policyholder's death, but, in contrast to traditional, cash-value insurance, it does not provide any other investment returns. Many financial planners prefer term policies because they are cheaper and because returns on cash-value life insurance policies tend to be low, making it a poor investment.
You also may want to consider buying what's called a guaranteed level-premium policy: one that locks in a premium for the life of the policy.
Parents may want to consider buying policies that will last for the duration of the time their children will need financial support, since insurance gets more expensive the older a policyholder gets. In other words, if you have an infant, you may be better off buying a 20-year guaranteed level-premium policy, rather than a 10-year policy with the intention of renewing it later.
Marlys Harris, personal finance editor at Consumer Reports magazine, recommends making sure the insurer is in solid financial shape.
"You want to go with a company that has a very good and safe credit rating," said Harris, citing Weiss Ratings as an example of a credit rating agency to check with. A.M. Best Co. is another agency known for insurance ratings. Some state insurance departments also maintain Web sites with information.
On The Net: Life and Health Insurance Foundation for Education: http:// www.life-line.org
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Dateline: Undated
Text Word Count 600
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