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Buying life insurance can be stressful because no one wants to think about the worst-case scenario. But the life insurance policy you take out on yourself isn’t really for you — it’s for your kids, your spouse, or for any other dependents you have.
Just like every parent doesn’t have the same income and expenses, every parent doesn’t have the same life insurance needs. Here’s how you can decide how much coverage you need, for parents and kids of every age.
Parents should include anticipated childcare costs in their life insurance calculation in addition to income, expenses, outstanding debts, long-term care, and funeral expenses
Buy life insurance before getting pregnant, in the first trimester, or three months after delivery for better rates
Life insurance can also protect your spouse, aging parents, or create a nest egg for your children
You may save money by overlapping multiple policies (“the ladder strategy”)
There’s no magic formula that answers the question, “How much life insurance do I need?” Generally, 10 to 15 times your annual salary is a good ballpark figure.
There are several types of life insurance, but term life insurance — a type of life insurance that lasts for a set number of years before expiring — is the right choice for most people.
Since life insurance exists to replace your income and cover expenses for your dependents after you’re gone, those expenses influence how much life insurance coverage you need. Essentially, you need enough life insurance to replace your income and cover all of your expenses for a given amount of time, usually until your kids are out of the house or your mortgage is paid off, but it could be longer. That means:
If you’re having trouble figuring out how much coverage you need, an insurance agent can walk you through the calculations and the best family insurance options for you.
For new parents, as for anyone buying life insurance, the question is: If you were to die today, how much money would you need to leave behind to keep your dependents going?
This includes day-to-day living expenses like diapers, toys, food, formula, and clothes plus larger bills, too — childcare, health insurance, even summer camp and school tuition, if you plan on sending your kids to private schools. The USDA estimates that it costs nearly $250,000 over 18 years to raise a child, but your figure could be more or less than that.
And then there’s college. If you’d like to protect your kids from student loan debt, the cost of college should be integrated into your life insurance policy.
And don’t forget about your mortgage or rent payments. If you want your family to be able to stay in your home for the next few decades, factor housing costs into your life insurance needs.
For women, the ideal time to buy life insurance if you’re planning for a baby is before you get pregnant (it’s the only way to ensure that you’ll be covered if something happens during childbirth).
Once you’re already pregnant, it’s best to either apply in your first trimester or wait until a few months after you’ve delivered. The reason? Life insurance companies will set your rates based on your health at the time of application. That means weight gain and gestational diabetes will be taken into account, even though those symptoms may be temporary.
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Maybe you weren’t in a position to buy life insurance until your kids were older, or maybe you just didn’t get around to it. But anything can happen, and it’s never too late to protect your family by buying life insurance.
Once your children are older, you have a lot of the same expenses you had previously. But maybe you also have more assets: It’s possible you’ve started saving for retirement, paid off a lot of your mortgage, or have a higher-paying job.
Deciding how much life insurance you need is the same: Figure out how much you need to replace your income and pay for expenses until your dependents are out of the nest.
If you started saving with a 529 plan when your child was young, you might be well on your way to paying for tuition.
But if your kids are older and you’ve only just started saving, you have a lot of ground to make up. Take into account how much you’ll be able to put toward college savings every month or year, what your goal needs to be, and how much of your life insurance death benefit you need to go toward that.
If you still have a lot of saving to do, college costs may eat up a disproportionate amount of the death benefit, and you still want to leave room for those other expenses. The good news, especially if you have teens, is that you may only need coverage for 5 or 10 years.
The life insurance coverage parents need once the kids move out depends on age and expenses. You might have a couple of decades to go until you retire, or it might be right around the corner. But now’s the time when you can focus on you.
Even if you have fewer dependents when the kids have flown the nest, you might still have a major one: your spouse. It’s great if you’ve been saving for retirement with IRAs or 401(k)s, but if you’re only, say, 50 when you become an empty nester, you still have at least a decade before you retire – that's a decade’s worth of saving and compound interest of which you need to take advantage.
That means that life insurance is still important. If you have a retirement savings goal, first of all, congratulations! Second of all, you probably factored in those intervening years before you reached your goal. If you die at 55 and were planning on saving until you were 65, that leaves a gap in your plan to ensure your spouse is set up for retirement. For example, it’s commonly recommended that by 55 you should have at least six times your annual salary saved and by 65 you should have eight times your annual salary saved. If you’re on the U.S. median salary of $52,000, that means that if you die at 55, your retirement fund could be short $104,000.
Life insurance can fill that gap. If the kids are gone and the mortgage is paid off but you’re still striving for retirement, don’t brush off the role that life insurance can play in supporting your spouse. You might not need as much coverage, but every little bit can help you secure your golden years.
Don’t discount the life insurance safety net you’ll need until you’re sure your nest is absolutely empty. It’s not uncommon for kids to move back home after they graduate college, so that can add some unexpected expenses to your budget.
You might also have other, non-child dependents who rely on you and your income at this point in your life — namely, aging parents or other elderly relatives. Though their own long-term care insurance can help cover the costs, if you are supplementing that with your own money, you need to factor those expenses into your life insurance calculations.
Consider what life insurance can do for you beyond covering expenses. Maybe you want to leave an inheritance for your kids, or you want to leave money to a charity you support. You can leave your death benefit to basically anyone or anything, so even if you aren’t paying for your kids’ expenses anymore, you might want a life insurance policy to leave a financial bequeathment to them or to cover the estate taxes on property or other assets you are leaving behind.
Everyone’s life insurance needs will be different at different points in their lives, but the important thing to note is that your needs will change over time. You just need to calculate (to the best of your abilities) how those needs will change.
Some people assume that only the primary breadwinner needs life insurance. After all, life insurance is meant to replace income, and stay-at-home parents don’t make an income.
But even parents whose income is non-essential for the family perform labor that would likely have to be outsourced if they weren't around. From housekeeping to childcare to budgeting, all of this work is expensive to replace. How much would it cost to hire a childcare provider or housekeeper to do that work if that parent were to die?
If the other spouse’s income couldn’t easily make up for these expenses, it may make sense to purchase life insurance for the stay-at-home parent. A spouse without an income can usually get approved for 50% of the coverage of the working spouse.
One way to make life insurance more affordable for parents is by employing a strategy called the ladder strategy.
With the ladder strategy, you have the most coverage you need when you need it most — that is, when you’re paying for childcare and saving for school — and then you have that coverage drop off as your coverage needs decrease and you pay down loans and mortgages.
The basics of the ladder strategy go like this: Instead of buying a single policy, you buy multiple separate policies, which saves you money. Consider this: The total cost of a $500,000/10-year term policy, a $300,000/20-year policy, and a $200,000/30-year term policy is typically cheaper than a single $1,000,000/30-year term policy.
As you reach new life and financial milestones, your coverage steps down. If you bought your policies when you were 30 years old, you’ll have $1 million in coverage for that first decade when your kids are young and you’re paying off your mortgage.
When you’re 40, the 10-year policy ends, leaving you with $500,000 in coverage for the next 10 years.
Then by the time you turn 50, you still have $200,000 worth of protection — enough to cover the remainder of your mortgage and expenses. The upside is that spreading the coverage out like this costs much less than buying a $1,000,000 policy that you needed at one point, which would be overkill at the end of the term.
Logan Sachon is the co-founder of The Billfold, a groundbreaking personal finance site for millennials that was named one of Time's 25 Best Blogs of 2012. Her work has been published in New York Magazine, Glamour, The Guardian, BuzzFeed and more.
Amanda Shih is a life insurance editor at Policygenius in New York City. She has a passion for making complex topics relatable and understandable, and has been writing about insurance since 2017 with specialities in life insurance cost and policy types. She's previously written for Jetty and LegalZoom.
Amanda has a B.A. in literature and communication from New York University.