This is a guest post from my friend Eric Rosenberg, a personal finance blogger and podcaster at Personal Profitability in partnership with Mason Finance. He writes about personal finance, credit cards, entrepreneurship, and technology.
“Till death do us part.” This line has been read at countless weddings, and rightfully so we focus on the life part of our relationship, not the death. But that does not mean it is never going to happen. And as part of life as a couple, it is important to discuss the financial realities of death.
When planning for the long-term, life insurance is an important pieces of the financial security puzzle. Coupled with other savings, including retirement, it can create a safety net that covers your family for many years to come. Let’s take a look at why life insurance matters and how to discuss it as a couple.
Intro to life insurance
If you are new to life insurance, let’s do a quick primer to get you up to speed. There are a few key facts to know about life insurance before you start doing any research.
First, there are several types of life insurance. The most popular is called term life insurance because it is good for a period of time known as a term. Term life insurance is popular because it offer the biggest benefit for the lowest monthly cost.
The younger and healthier you are when you get life insurance, the less you’ll pay. Longer terms increase the price, as does a risky lifestyle that includes activities the insurance companies call “risky,” like rock climbing, skydiving, and flying small aircraft.
If the insured passes away before the end of the term, the policy beneficiaries get a payout. If the insured outlives the term, the policy expires for practical purposes.
Okay, there you go. We have the basics covered!
Figuring out your life insurance need
If you think life insurance makes sense in your situation (and it probably does), the next step is to figure out how much you need. Because life insurance policies are often priced in a cost per thousand dollars, getting too much life insurance may cost too much. But on the other hand, you don’t want to be underinsured and leave your family at risk.
To calculate what you need for life insurance, try the following formula:
[monthly expenses] x 120 + [big future expenses] = minimum life insurance need
Breaking it down, you are covering 10 years of expenses plus any major future expenses, like college costs or a mortgage payoff, which ensures your family has a long runway without worrying about going hungry.
Another way to find your policy value is using the popular 4% rule. This rule says you can safely withdraw 4% per year from an investment in perpetuity without ever running out of funds. For this calculation, use the following formula:
[(monthly expenses)*12]/.04 = minimum life insurance need
Using this method, a family with $3,000 per month in expenses, or $36,000 per year, would need $900,000 in life insurance.
Discussing life insurance with the significant other
No one ever walked into a room smiling and said, “honey, let’s talk about financial planning for me dying someday.” It is not always a fun conversation, but it is so important to talk about life insurance and other long-term financial planning needs.
In my experience, the best way to approach this is just being blunt, honest, and focusing on the facts. While you are probably not going anywhere anytime soon, it is good to be prepared just in case. That’s what insurance is for, after all, the “just in case” scenarios.
If you can go into the conversation prepared, it makes it smoother and easier. With that information in hand, you can discuss your needs and a plan to find and apply for the right life insurance policy.
What to do if you over insured
If you already have life insurance, this section if for you. Even when you have life insurance, it is a good idea to do an annual check-in to see how you are standing compared to your needs.
Because you are a smart saver and putting money away each month, you should see your savings balances grow and grow over time. Eventually, that savings level may grow beyond the point of needing life insurance.
For example, in the scenario above, a family with $3,000 in monthly expenses needs a $900,000 life insurance policy to ensure all costs are covered. But if you can save $900,000 or more, you don’t need that life insurance anymore at all!
If that sounds like you, check out this policy estimator to find out what your policy may be worth if you decide you no longer need it. Don’t let a policy simply lapse or you could be leaving money on the table.
Protecting your family is important
Your family’s long-term financial security is too important to gamble on. Instead of risking it all on a hope that nothing bad will ever happen, life insurance can help you hedge against that terrible “what if.”
Go head and have the conversation, even if it makes you a little uncomfortable. By planning for the future, you know you can rest easy in the present with your family protected by the right level of insurance.