As a parent, you are likely well aware that you should have a life insurance policy to ensure that your children are financially cared for in the event of your death. What you may not know is how to determine the size of policy you should carry. The following guide can help you with this task.
Step #1: Determine how many policies you need
Your first decision will be how many policies you need to carry, or at least how many beneficiaries should be placed on each policy. If you only have children from one marriage and you are still married, a single family policy is probably sufficient. If you have children from multiple marriages, it is a good idea to get a separate policy for each child or separate family unit. This is especially important if an ex-spouse depends upon your child support to help raise your children.
Step #2: Consider what needs to be replaced
If you are the primary income earner, at a bare minimum you need to carry enough of a policy to replace your income in the event of your demise. You may think your spouse can return to work to make up some of the lost income, but keep in mind this will carry other expenses, such as child care. If you only worked part-time and were not the primary breadwinner, then simply determine how much of your income was necessary to maintain your family's quality of life and look to a policy that will replace the income.
It is up to to decide how long the income will need to be replaced for. For example, if you have young children, you may want to make sure that your spouse has enough benefits to live on until the children reach school age. If your children are older, you may only need to provide enough to cover a couple of years so that your family can regain their equilibrium after your loss.
Step #3: Add on funeral costs
Unless you have already prepaid for your final arrangements, your family will likely be paying for the funeral either from their savings or from the life insurance payments. Add enough onto the policies to cover the cost of your preferred burial method or cremation, along with the costs for the service itself.
Step #4: Look to the future
Although most life insurance policies are designed to help your family in the immediate year or two following your death, you may have some long-term concerns about their well-being. If it was your intention to pay for your child's college education or eventual wedding, for example, you may want specific policies in place earmarked for just these expenses. In this case, you will need to invest in a life insurance trust (LIT). An LIT dictates when the money will be paid out and to whom, so you can set it up to pay yearly tuition for a certain amount of years, for example, instead of being awarded as simply a lump sum.
Once you have worked out these considerations and factored your monetary needs, meet with an insurance agent to purchase the products that you need.