When it comes to life insurance, the most common questions we hear are, “How much coverage do I really need? What is life insurance supposed to cover?”
And, like many things with personal finance, the answer is – it depends.
It depends on how old your kids are and where you live. How much you already have saved and the debt you have. But, most importantly, it depends on what you want your life insurance to cover.
Life insurance payouts can be used for whatever your beneficiaries choose. There are no restrictions on how that money is spent after you’re gone (unless it’s paid to a trust.)
So, to determine how much coverage your family personally needs, you have to consider what financial support and legacy you want to offer your family after you’re gone. What help will they need?
To help you figure out what you want your life insurance policy to cover, here are 7 of the most common expenses life insurance helps families handle.
This post is sponsored by Haven Life Insurance Agency, affordable, simple term life insurance that you can purchase quickly and easily online to protect your family. As always, the opinions expressed are entirely my own.
What Does Life Insurance Cover?
Funeral & End-of-Life Expenses
The most immediate use of life insurance for almost all families is to cover the cost of a loved one’s funeral or memorial. This usually ends up being much more expensive than families expect.
According to the latest survey by the National Funeral Directors Association, the average cost of a funeral in 2019 was $9,135. But that’s before the cost of a cemetery plot, which averages around $2,000. Cremation is less expensive, averaging between $4,000 and $7,000.
None of us want to leave our families with the stress of pinching pennies or setting up a GoFundMe to cover the cost of our funeral. This is why sufficient life insurance can be such a huge relief.
Time Off to Grieve
When it comes to life insurance, this is one area that my husband and I discussed at length when determining how much coverage we needed.
Handling the loss of a spouse is no small thing – nevermind having to parent children who have just lost a parent through their own grief, all while you face your own.
As my husband is a stay-at-home dad, my life insurance policy is sufficient to allow him to stay in that role until the boys are adults, even if I am gone. But for his policy, I knew it wasn’t just about covering funeral expenses and added childcare costs, but also giving me the freedom to take time off from the business.
Personally, we decided on a year. And not a normal year, but one with heightened expenses for therapy and household support. That year of cushion is noted in our Family Emergency Binder, so I’m not tempted to force myself to try and manage our normal routine and workload.
Grief time is one of the more emotional and powerful uses of life insurance. It’s a last show of support and love for your family, even if you’re not there to wrap your arms around them.
Moving is terrible. It’s even more terrible if you are forced to do it after losing a loved one because you can no longer afford your home.
While federal law allows a spouse or relative to be left a home as an inheritance, occupy that home, and assume the mortgage instead of having to refinance immediately, which would be the case if the due-on-sale clause was activated, you still have to be able to afford the mortgage payment.
A life insurance policy can help cover those mortgage payments or pay off or pay down the mortgage to offer your family more stability.
Most families rely on two incomes to cover their monthly budget. So, without one partner, there has to be a way to pick up the slack. Life insurance can help you do that.
Over time, you or your partner may be able to find a way to adjust your spending or earn more money to cover the deficit. Yet you don’t want to have to do that on a tight timeline or in the midst of your grief.
When deciding on your life insurance needs, consider your budget and what day-to-day expenses you’d need to be able to cover. What is your partner’s earning potential and how capable are they of filling that gap? How much time would you like to be able to offer support?
Make sure that amount is built into your life insurance coverage.
Shared or Co-Signed Debts
If you have any joint or co-signed debts – cars, home equity lines, consumer debt – those expenses will fall to the surviving individual named on those debts. Similar to your mortgage, you need to ask yourself if your family member would be able to handle those expenses on their own.
Luckily, federal student loans do not pass to your family members. But private student loans – including refinanced loans – can go after your estate for payment.
Life insurance can cover these debts so that assets aren’t repossessed or damaging your loved ones’ credit by being sent to collections.
Every parent knows that childcare is ridiculously expensive. And for some families, not much will change with regards to childcare after the loss of a parent. If your kids were already in daycare or after school care, those costs are likely built into your day-to-day expenses.
But what about the ways childcare can change after the loss of a parent?
Your Family Has a Stay-At-Home Parent
Stay-at-home parents provide immense financial value to their families – which is why they need life insurance.
My husband’s life insurance policy is there to help cover the costs of all the help the kids and I would need if he wasn’t there. Things like daycare or a nanny.
When deciding how much coverage a stay-at-home parent needs, research the cost of childcare in your area and how long your kids might need that care.
Your Kids Are Cared for by a Guardian
Asking someone to be your child’s caregiver if you were no longer around is a scary and powerful thing. And while adding kids to your household isn’t ever something taken lightly, you want to avoid making it a financial burden on your children’s guardian.
Consider how much you would want to leave to your children’s guardian to house, clothe, feed, and care for them through to adulthood.
Would they need to move to a bigger home? Get a different car?
You can control how this money is accessed in your estate plan with a proper trust, to make sure the money isn’t mismanaged, but the transition will likely be easier on everyone if money isn’t a major worry.
(And, yes, if you’ve asked someone to be your child’s guardian, I would recommend discussing with them your estate plans and the financial support you will be able to provide.)
A Personal Legacy
A while ago, someone reached out to me on Instagram after I posted something about estate planning sharing what her father did for their family when he lost his battle with cancer. I was moved to tears.
Her dad had enough life insurance to cover their core needs, but he let them know there was also enough to send them all on a six-month trip. He told them all the places he wished they would visit together and after his funeral and estate was handled, she, her mom, and her siblings traveled together.
It was, of course, an emotional trip. But also a beautiful one that brought them closer together with happy memories in a difficult time.
Now, you may not want to purchase extra life insurance to fund a trip around the world, help your kids with a downpayment for their first homes, or to leave money to your favorite charity.
However, the coverage you need today may not be the coverage you need in 10 years, especially if your children are young now.
So, as you age, come back to your life insurance and what it could do for your loved ones and the legacy it could create.
Secure the Coverage You Need as Soon as Possible
As you can see, life insurance can cover a wide range of needs for your family. It’s why most professionals recommend 7 to 10 times your annual income in life insurance.
Luckily, while that might feel like a big number, that coverage doesn’t have to be expensive.
The younger and healthier you are, the more affordable term life insurance is. Which means it’s usually better to apply now rather than later.
So, think through all the different uses of term life insurance and how it could best fit your family to determine the amount of coverage you need.
Then, you can apply for coverage in just minutes, from your computer, with Haven Life to give your family the financial protection they need.
Having sufficient life insurance coverage helps me sleep better at night knowing that, no matter what happens, I’ve cared for my husband and kids even if I can’t be physically there.
Do you have enough life insurance to cover your family’s needs? Share in the comments!
Haven Term is a Term Life Insurance Policy (ICC17DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and not be available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.