How much life insurance is really necessary?

Question

I am a 26 year old married mother of 3, and the sole income of the household. We have no assests, and do not own a house.

Answer 1

Well, that's the kicker.  No one here knows.  We don't know what you want that money to ACCOMPLISH.  

You need to set the goal, then back into the amount, figure out if there's a time you won't need it, THEN select the product(s) based on your needs.

Answer 2

http://www.metlife.com/General/0,5018,18...

MetLife is a very creditable company, and very competeitive in the Life Insurance Market.  Use this tool that asks you to answer questions designed to figure out your question.

G'luck

Answer 3

Depends on your goals. Do you want to provide a college education for the children if the breadwinner dies? Can your income support three children? Are the children young? If so, do you want to stay home with the children?

When you are able to define your goals you will be able to determine how much life insurance you will need.

Answer 4

The purpose of life insurance is to insulate a family from the financial burdens that accompany the premature death of a breadwinner. The death benefit of a life insurance policy should replace the breadwinner’s income for a reasonable period of time, so the family adjust to the loss. Some experts say that period is 3 to 5 years, others say five to seven years. If the insured makes $50,000 a year, then you would want a death benefit between $150,000 and $350,000.

http://ezinearticles.com/?Life-Insurance...

Answer 5

How much might it cost to raise 3 children until they're old enough to support themselves, and to put them through college? Do you know anyone that would be able to take over the duties of raising the kids?

Do you have any outstanding loans (student loans, car loans, etc.)?

Depending on the age of the children, you have a while before they're all able to support themselves in the case that something happens to you. If I were you, I'd look into a decent amount of term insurance to cover you at least until the time that all of your kids can be self-supportive. A 20 year term at your age (depending on health) isn't too expensive.

Answer 6

You've hopefully done a will showing who gets custody of your children if you're gone...

Check with that person & find out how their finances will change if they take custody of your children.

-Will they need a larger house? How much more will that cost them per year?

-Calculate additional expenses (food, utilities) they will incur per year?

A good way to calculate how much life insurance is to take whatever the answer to those 2 questions is... X 5. You should typically help take care of your children for 5 years after you're gone.

This is typically a large amount so a term policy is best and most affordable - since your children will be 18yo someday and then these calcuations won't be necessary.

AND a whole life burial policy of about $25K is all that's necessary once the kids are 18yo. And taking that out now when you're young & healthy is best.

Answer 7

The purpose of life insurance is to replace the lost income for your survivors if you should die.  If you are the sole income and have children, you should seriously consider it.  You can obtain 20 or 30 year level term insurance at very reasonable premium rates.

Answer 8

I am less concerned with the type of insurance (although term is most affordable) as I am with the amount.

Your children are likely very young and will be dependent on you for 15-20 years or more.  Your spouse is also a financial dependent.  You should buy enough insurance to replace at least 75% of your income for a 15-20 year period.  Most of the bills will still be there if you die.  

If you want to provide for education bump up the amount of coverage accordingly.  The  same applies if you want to have funeral coverage or pay off any debts (ie student loans, credit cards, car loans).

Term life insurance is usually very affordable at your age.  20 year term make sense for what I know about your situation but go with 10 year term if you can't afford the cost of 20 years.  Just understand that the cost will go up in 10 years.

I hope that helps.

Answer 9

$0.  Your estate could be settled insolvent and your debts will usually be washed away.  You could be buried as an indigent by the state.  The foster care system is designed to help children whose parents aren't around anymore.

If you don't want your kids to go into foster care, have control over your bodily remains, and fulfill your promise to your debtors, that costs money.  Like Tori said, talk with your children's planned guardian and include another advisor like a lawyer or your accountant in the conversation if you can.

My quick formula is usually:

(income) / (6% to 8%) - (liquid assets) = insurance amount

At 26 with okay health, this should be cheap.

Answer 10

Life insurance should pay for funeral expenses and provide for your children to some extent.

If you were to be suddenly gone where would your children end up?

With a relative, or in the governments system of foster care?

It is a personal choice and you need to decide who will provide for your children in the case that you cannot which might very well be a deciding factor in how much you feel you need.

My opinion for what it is worth...

I had not noticed that you are the sole provider for your family and ARE married. If this is the case, I strongly suggest that if the other half of this marriage is not providing he should have a very good reason for not doing so as if he is unable to work he should be drawing an income for a disability or such and otherwise I will say no more as that is a raw subject for me.

http://www.12freeyourdreams.com

Answer 11

You should probably have a 20 or 30 year term policy in the amount of 5 to 10 times your annual income.  The lower end if your husband has viable career options and the higher end if he is basically just going to stay home and raise the kids and not return to work until they are adults.  The 20 year policy should get most of your children into adulthood and out on their own.  The reason I choose term is that I believe that your situation as much coverage for your premium dollar as possible and you are not in a position to be building up cash values, etc. in some kind of whole life or universal life policy.  

I would also suggest that you get a smaller term policy on your husband if he is the primary care giver.  This would provide for childcare expenses for you if something were to happen to him.  If you wanted to stay home with the children if something were to happen to him then you should by a face amount equal to your policy so that you could replace your income when you stay home.  

Be sure that you and your husband name each other as the beneficiary on each of your policies.  

After you get your life insurance in place, make sure you have a will that specifically lays out what happens to your children and what happens to the life insurance money if something were to happen to the both of you.  

It's good that your are taking care of this.  Good luck.

Answer 12

You need enough life insurance so that your husband will have a big enough pile of cash to invest, and only some of the gains will be used to replace your income, without touching the principal.

I suggest a policy of about 20x your income.

Here's why:

A typical mutual fund grows at about 10%/year, while inflation historically has grown at 4%/year.

Let's say you make $50,000, and you get a $1,000,000 insurance policy.

The plan: The entire $1,000,000 goes into a set of mutual funds.

In January each year, the money that your family will need for the entire year ($50,000 this year, adjust for inflation in future years) will get pulled out of the mutual funds and into a savings account

The rest of the money will continue to grow during the year, where it will stay off limits to EVERYONE.

Value - The value of the money in the future, after inflation has eaten away at it.  $1,000 in 2008 will buy a whole lot more than $1,000 in 2028, so we need to adjust.

Year  --  Jan Cash -- Jan w/d -- Feb Cash  --  December - Value

1  --  $1,000,000  --  $50,000  --  $950,000  --  $1,045,000  --  $1,045,000

2  --  $1,045,000  --  $52,000  --  $993,000 -- $1,092,300  --  $1,050,288

3  --  $1,092,300 -- $54,080 -- $1,038,220 -- $1,142,042  --  $1,055,882

4 -- $1,142,042 -- $56,243 -- $1,085,798 --  $1,194,379  --  $1,061,798

Notice how the Value goes up.

With only $900,000 to start with, the value goes down.

There isn't enough growth to keep up with inflation and support the annual withdrawls without draining the value of the policy.

Taxes: The money that's withdrawn each year will be liable for capital gains tax on the growth, but regular income would be taxed at much higher rates.

Make one little change: Assume the stocks grow at 11%/yr instead of 10%/year, and you'll only need 15x your income instead of 20x in order to keep up.