As newlyweds committed to a permanent relationship, you’ve started the long downhill slide into finally becoming your parents. And as part of your new commitment to stability and permanence, perhaps even as part of your first home purchase together, you may be considering life insurance.
The first question you’ll want to answer is, how much life insurance do newlyweds need? The answer it turns out, is ‘it depends’. It depends on a few factors, including your debt load and mortgage, as well as your attitude towards what you want to have happen financially should you die.
Life insurance is intended to provide a lump sum death benefit when you die. For it to actually be ‘insurance’ and not a lottery, you, or more specifically your beneficiaries, need to suffer a catastrophic financial loss. The loss for most of us upon our death is our paycheck – our beneficiaries lose our income when we die.
If you have kids, then most of us would agree that the kids have suffered an unrecoverable financial loss. They’re entirely dependent on you financially, so if you’re gone, life insurance is the perfect replacement for your income.
However if we assume a stereotypical newlywed couple, we’re looking at two adults with no kids yet. If one of you should die early, is the surviving spouse dependent upon your income for their future? And that’s where the ‘it depends’ part comes in.
You’ll need to determine how much, if any, your surviving spouse is dependent on your income. That answer can vary anywhere from none to 100%. In addition you’ll need to answer how long they would be dependent on that portion of your income. If your answer is that they’re not dependent on your income, then you need no life insurance from this perspective. Alternatively you may decide your spouse will need 30% of your income for 10 years. In that case simply take 30% of your income and multiply it by 15, and you’ll have a starting point.
The second factor that you may consider life insurance for is if you have a mortgage. Many newlyweds with new homes will need enough life insurance to cover their mortgage as the lender may require it. This is a fairly straightforward determination – how big is your mortgage?
And finally, some couples seek life insurance just for final expenses and to cover any other debts they may have up to that point. However bearing in mind that we normally want insurance to cover a catastrophic loss, you’ll need to determine if you in fact see these expenses as catastrophic. If you determine that burial costs and any outstanding debts can be paid for by the surviving spouse then this would minimize the need for coverage as well.
The final answer is just the rough sum of these three numbers:
- Percentage of your income X a number of years (only if you want/need to provide replacement income) plus
- Amount of your mortgage, if any, plus
- Other outstanding debts and loans, plus final expenses. (if you consider these costs to be an insurable need).
It’s not much more scientific than that. Sum those three numbers and you’ll have a reasonable estimate of your insurance costs. Because these costs are estimates however I recommend rounding up to the nearest multiple of $100,000 or $250,000. e.g. If you arrive at mortgage plus other debts to be $185,000, I would recommend rounding up to $250,000. Having a bit of extra coverage is normally relatively inexpensive and having more is always better than having less should you suffer a claim.
In the end, the amount of coverage many newlyweds go with is either minimal, or enough to cover their mortgage plus some additional coverage for final expenses.
Today’s guest post is from Glenn Cooke who is a life insurance broker and president of Life Insurance Canada.com Inc. I had the pleasure of meeting Glenn a few months back when I was inquiring about increasing our life insurance since we are now newlyweds. I have never met anyone who knows as much about life insurance as Glenn. He is passionate and committed to educating consumers on life insurance.