Life insurance is a must-have for many people, but it’s especially important to have if you’re raising children on your own. Surprisingly, nearly 70% of single parents lack life insurance, according to a study from Genworth Financial. Maybe you don’t have coverage or you’re wondering if your existing policy is enough. These four questions can help you figure out how much life insurance you need as a single parent.
Consider working with a financial advisor as you explore which types of insurance to get and how much coverage you should have.
1. How Much Do You Make?
Life insurance provides your family with an additional source of income in case something happens to you. The general rule of thumb maintains that policies should cover at least 50% of your annual income. Alternatively, others advise that your policy should cover at least seven years of your salary. However, as a single parent,you may need even more coverage.
2. What Will the Money Be Used for?
Simply having life insurance as a single parent isn’t enough. You also need to know what the money will go towards when you pass away. The answer to that ultimately depends on how old your kids are and what would happen to them if you died before they reached adulthood.
Let’s say you have young children, for example. Your insurance policy may only need to supplement income rather than replace. This is in the event that a financially secure relative could take over caring for your children. On the other hand, your chosen guardian might not make enough to cover the additional expense of raising children. In that case, you might need more coverage.
If your children are older, you might want to use life insurance as a safety net. For example, the payout can help pay their college costs in case you’re not around to help out. Average annual costs for tuition and fees can range from a few thousand dollars to upwards of $50,000 at some private colleges. Your policy might need to factor in your child’s college plans. Will your child attend community college or shoot for the Ivy League? Even if college seems far off, you may want to err on the side of more coverage.
3. How Much Life Insurance to Buy
There are two major considerations as you determine how much life insurance to buy. One is current and long-term expenses; the other is current assets, including savings and existing life insurance.
These include mortgage payments, other outstanding debts and expected future expenses. When you die, the executor of your estate will assess all of your debts. If you have any outstanding debts, your assets will go towards paying them off first. If you’re still paying off private student loans or have other debts, your creditors could go after your life insurance proceeds. This would happen even before your beneficiaries see a dime, depending on your state’s laws.
If you have thousands of dollars in debt, you might need to increase your life insurance to cover your debts so your kids don’t end up shortchanged. This is also important if you’re raising kids on your own but you’re not legally divorced yet. If that’s the case, your spouse could get stuck footing the bills for your debts.
Savings, existing insurance, other assets
On the other side of the ledger are securities, such as stocks, bonds and alternative investments, as well as bank accounts. It also includes additional life insurance you may have from your employer. Finally, your child or children may be beneficiaries of policies bought or a trusts created by family members, such as grandparents.
Subtract this total from current and long-term expenses to get an estimate of how much life insurance you’ll need.
4. How Much Coverage Can You Afford?
Life insurance premiums increase as you buy more coverage. Part of your buying decision will work with what fits into your budget. Term life is the cheapest option and it may be possible to get covered for just $20. Generally, the younger you are when you purchase life insurance, the better the deals are on premiums.
A whole life policy allows you to build cash value that you can borrow against and it’s permanent as long as you keep up with the premiums. Term life policies, on the other hand, expire after a set period of time. The trade-off with whole life insurance, however, is that the premiums are usually much higher. So it’s a good idea to factor in the recurring cost versus the long-term value to determine which policy is the best fit for you. The important thing is to get sufficient coverage for you and your family, coverage that you can afford to pay for each month.
As you consider buying life insurance, or adjusting the life insurance you already have, there are four key questions you should answer: how much you earn; what the insurance money will be used for when you die; how much debt you have; and how much coverage you can afford.
Tips on Insurance
- For a more personalized answer to the question of how much life insurance you need, check out SmartAsset’s life insurance calculator. The tool helps you find a personalized policy based on your location, birth year, annual income, marital status and other factors.
- ILife insurance is a key component of a financial plan and a financial advisor can help you determine how it factors into your full financial situation. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.o
Photo credit: ©iStock.com/svetikd, ©iStock.com/michaeljung, ©iStock.com/szefei