Single Step Personal Finance Challenge - You Really Need Life Insurance

July 24th, 2008

Last week, Mrs. Micah challenged the personal finance blogosphere to come up with a single step they could (and should) take to improve their personal finance system. As always, I’m late with joining just about every trend, but here’s the single step I need to take:

Ever since the birth of our daughter, my wife and I have been talking about the various things we can and need to do to be better parents. We read to her to help her learn a love for books; we play with her so she grows up a happy child; we feed her healthy foods so she can stay healthy. These are all great things to do for a child, but we’ve there is one thing we’re sorely missing if we’re to be responsible parents: Life insurance.

I do have a whole-life plan that my parents bought for me when I was a child that is worth $10,000 and I have term life insurance through work that is set to pay out three times my salary ($210,000), but my wife has none. Until recently, I thought it was sufficient to cover my remaining debts with my life insurance so that my family would have a house to live in if I died, but that didn’t take into account the extra expenses and the fact that my wife would have to go back to work in order to feed the children. And if my wife died, heaven forbid, there would be absolutely no help for me to raise the children and pay for the house.

I’m not sure exactly how much I need (I still need to do more research and calculations), but I wouldn’t be surprised if I need coverage for at least $750,000, if not $1,000,000. If you’re still deciding on how much insurance you need, answering these simple questions can help you figure out your target:

Who do I need to cover? - I’m buying life insurance so that I can provide for my wife, my daughter, and my unborn child in the even that I should die. That’s three mouths that need to be fed, three heads that need to be sheltered, and the three most important people to me in the whole world.
How long do I want to cover them? - My wife and I are nowhere near retirement, so it’s unlikely she would be set for life with any reasonable amount of insurance. Instead, I want to cover her and my children at least until the children are out of school. I may not be able to keep my wife from having to work, but I would like to minimize the financial pain. I think the best coverage I could give right now would be 20 years.
How much will they need? - After paying off the house and all our existing debt, I figure my family could survive on $35,000 a year. Things will be tight at that amount, but I want to maintain at least that minimum for my family.
How much do you already have? - Our emergency fund is floating somewhere around $12,000 right now. That’s enough to pay some early bills and for my family to live on while waiting for the insurance payout. It isn’t any more than a stop-gap amount, but if I had $1,000,000 sitting in the bank already, insurance wouldn’t be quite as big of a deal.
Are there any special expenses you want to cover? - I want to pay off the house immediately so that is one less thing for my family to worry about. They need a roof over their head and they don’t need to be concerned with how to pay for it. On top of that, I’d like to set some money aside for my children in case they choose to go to college. I’m not going to pay for it outright, but I would like to give them some help. If they don’t go to college, at least that money could be used for a down payment on a house of their own when they grow up.

After looking at my answers to these questions, $750,000 appears to be a bare minimum and it’s more likely I’ll need $1,000,000 or more. How would you answer these questions and what kind of dollar amount do they tell you you need?

Sometime next month I’ll start shopping around for insurance for the two of us. Do you have any recommendations on who I should investigate or companies I should steer away from? I’m curious what you have to say on this.