Thanks to life insurance policies and credit cards, more families are able to handle funeral expenses for a loved one without being left in dire straits. But what happens two, six or nine months after a breadwinner passes away? Can the surviving family members still afford to maintain the home, keep up with monthly expenses or send kids off to college? For many households, no is the likely answer.
“In the early stages of financial planning, I ask my clients one critical question: ‘How long would it take for a household to feel the financial impact from a loss of the primary income earner?’” says Michael V. Daniels, a senior financial adviser with Financial Focus Group in Jersey City, N.J. “In many cases, life insurance is a cost-effective way to help families replace a significant loss of income.”
It may be difficult to think about, but life insurance is one of the basic building blocks of a solid financial plan. The economic stability of a household can be quickly derailed by an untimely death. Life insurance isn’t just for burial costs; it can also provide funds to supplement the family’s loss of income and ward off any potential monetary challenges surviving loved ones may face.
A 2011 study sponsored by two leading insurance industry associations, LIMRA and the nonprofit LIFE Foundation (now known as Life Happens), found that African-Americans are more likely to have life insurance, with 76 percent of those surveyed owning insurance, versus 62 percent of Whites and 54 percent of Hispanics. Underinsurance, however, remains a problem; a 2012 poll revealed that 42 percent of Blacks said they were in need of more life insurance, compared with 32 percent of the total U.S. population.
So just how much coverage do you need? There is no one-size-fits-all answer. Generally, 10 to 15 times your annual income is a good starting point to provide for your dependents. For example, if you earn $75,000 a year, a policy of $750,000 to $1,125,000 will help ensure your beneficiaries can sustain their standard of living. Life insurance companies will consider up to 20 times your yearly salary. Still, your final amount shouldn’t be based on income alone. If you have any set financial goals for your family, such as college tuition or a wedding fund, you may want to add them to your coverage amount so that in the event of an untimely passing, those plans may still continue.
Finally, you’ll want to add the cost of your death, including funeral, burial, probate costs and any special arrangements, says Jaime Quiros, an associate portfolio manager for Bethesda, Md.–based FBB Capital Partners.
Adds Daniels, “Another way to think of life insurance is ‘lifestyle’ insurance.” Check out a thorough online insurance calculator such as at 360FinancialLiteracy.org.
Once you’ve got a ballpark figure in mind, look at your product options. Don’t assume your employer-provided life insurance is sufficient. Most companies offer only about $10,000 per employee; meanwhile, the cost of a funeral itself can run upward of that.
Financial experts agree that sufficient life insurance is essential if you want to ensure your family’s security and happiness. For those who may be put off by the idea of life insurance as benefiting from death, Daniels suggests adopting a new attitude.
“Rather than viewing life insurance proceeds as benefits, people should think of them as protection against a financial burden on loved ones.”