As a father of two young kids I worry a lot about making sure I can provide for them. But what happens if I am not able to be here to provide for them? I have seen too many tragic stories of parents who have passed away leaving behind a young family. It is sad reality but none the less one that we must all face. On top of the emotional burden of losing a spouse or parent there is a financial void that is left. This is where life insurance comes into the play.
I consider life insurance to be one of the fundamentals of a healthy financial life. In this post we will look at:
- The two basics types of Life Insurance
- How Much Life Insurance to Have
THE TWO BASICS TYPE OF LIFE INSURANCE:
Life insurance is broken down into two main categories: Term Life Insurance (last for as long as the term permits) and Permanent Life Insurance (remains until you die). On first glance who would not want to have life insurance until they die? But on closer inspection permanent insurance can cost up to double or triple the cost of term insurance and most people only need insurance for the first 30 years of married life. But why? Life insurance is used to fund major expenses in the case that a provider dies prematurely. The major expenses are typically:
- The first few years of income until the family can get back on their feet
- The cost of college education funding for the kids
- The cost associated with paying off the mortgage
All of these expenses are only around for the first year years of marriage for the most part. The income replacement is being saved via your retirement fund, the cost of college education is done after 30 years and the mortgage is paid down. So term insurance covers all of these expenses at a third of the price.
HOW MUCH LIFE INSURANCE SHOULD I HAVE?
The best way to decide how much you need to to calculate the cost associated with the expenses above:
- After tax yearly income times 3 = A
- The cost of college education time the number of kids= B
- The remainder of the mortgage= C
Insurance amount needed= A+B+C
In conclusion, life insurance if a basic building block of a healthy financial life. Term life insurance is an inexpensive way to get solid coverage.
Are you leaving your family in good hands if something was to ever happen to you?
