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.
How to determine your life insurance needs
There’s no magic formula that answers the question, “How much life insurance do I need?” But our life insurance calculator comes pretty close. For a more general idea, 10 to 12 times your annual salary is a ballpark figure for many people.
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.
SPONSORED: Find a Qualified Financial Advisor
1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.
Since life insurance exists to replace your income and cover expenses for your dependents after you’re gone, the amount of those expenses is what influences 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.
Life insurance needs for new and expecting parents
For new parents, as for anyone buying life insurance, the question to ask is, if you were to die today, how much money would you need to leave behind to keep your dependents going?
This number 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 $250,000 over 18 years to raise a child, but your figure could be more or less than that.
Life insurance needs for parents with teens
Once your kids are older, you have a lot of the same expenses you have 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 gotten a higher-paying job.
If you started saving with a 529 plan when your child was young, you might be well on your way to paying for tuition – or maybe not, considering how quickly college costs are rising.
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. The good news, especially if you have teens, is that you may only need coverage for 5 or 10 years.
Life insurance needs for empty nesters
The life insurance coverage you need once the kids are gone depends on your age and your 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. If you have a goal for a retirement amount, 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 plans to ensure your spouse is set up for retirement.
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 discount the role that life insurance can play in helping your spouse be comfortable. You might not need as much coverage, but every little bit can help you secure your golden years.
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 with your own money, you need to factor those expenses into your life insurance calculations.
Life insurance for stay-at-home moms and dads
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 outsourced if they weren’t around to do it. From housekeeping to childcare to budgeting, the labor performed by parents 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 a policy 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. You can learn more here.
This article originally appeared in Policygenius and was syndicated by MediaFeed.org.
Featured Image Credit: jacoblund / iStock.