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The stage in life when most adults have the most need for life insurance is when they are parents and their children are young. Unfortunately, this is often a time when financial resources are already stretched. Unlike health insurance and house payments, life insurance can easily be regarded as optional rather than a priority.
To fully appreciate the value of life insurance, it may help to think of it in a different way. Its major function for young parents is as "income insurance." At this stage of life, it is not an investment. Like homeowners and auto insurance, it is an expense for essential coverage that you hope never to have to use. Its purpose is to provide for the family, if one parent should die, by replacing that person's paycheck.
How much life insurance is necessary?
The short answer is "as much as you can reasonably afford, and more than you probably think you need."
I recommend that parents of young children have a minimum of $500,000 to $1,000,000. Coverage for a stay-at-home parent is just as important as it is for a primary breadwinner. This may seem ridiculously high until you start looking at how much it costs to raise a child as a single parent. Just the basic costs of food, housing, health insurance, and daycare can be daunting. If you add in expenses like sports, music lessons, orthodontia, or college tuition, $500,000 doesn't seem like such a huge sum.
What makes this level of coverage affordable for young parents is term life insurance. Term insurance, as its name implies, is a policy taken out for a specific length of time, commonly 10 to 20 to 30 years. It pays the beneficiary the face amount upon the death of the insured, with no investment component or accumulated cash value. Because it is insurance only, it offers the most income replacement for the lowest cost.
If you are in good health, term insurance is relatively inexpensive. For a 33-year-old non-smoker, for example, a $500,000 policy would cost a woman around $30 a month for a 20-year term or around $45 a month for a 30-year term. A man would pay around $36 a month for 20 years or $60 a month for 30 years. The longer the term of the policy, the higher the premium.
If you're in your 30's, the ending date of a 20-year term life insurance policy may seem far into the future. Once a policy is in place, it's easy to disregard it except as one more regular expense. It can be a rude awakening, then, to reach your mid-50's and get a notice from the insurance company that your policy is expiring.
The biggest risk with such a situation is that you aren't able to renew the policy because you have become uninsurable. To minimize this risk, it's wise to purchase the longest term policy that you can afford. It's also a good idea to review your life insurance needs every few years so you can make timely decisions about whether you need to renew or extend your term insurance.
It's helpful, as well, to be clear about the purpose served by term insurance. In most cases, the focus is to provide for minor children, not to provide income for a spouse after the children are grown.
Ideally, by this stage in life, a widowed spouse will not need a large life insurance policy to produce income. Instead, with the money the couple has saved through buying low-cost term insurance, they have been able to fully fund their retirement plans.