Account for Children When You Buy Life Insurance

Parents are financial fiduciaries for their children. They have a responsibility to ensure their children a secure living standard no matter what transpires, including their own demise. ESPlanner helps parents fulfill this obligation by showing them how much life insurance is needed to preserve their survivors’ living standards.

Take Hannah, who earns $70K after inflation, and her husband Steve, who earns $60K. They have regular assets, retirement accounts, and future Social Security benefit claims that are commensurate with their middle class earnings. Table 1 shows the amounts of life insurance needed by both spouses to protect each other’s living standard.

Table 2 show the requisite insurance holdings if Hannah and Joe have a one-year-old child. Surprisingly, recommended life insurance holdings are smaller than in the case of zero children. How come?

We’ll, thanks to the extra mouth they now must feed, the household’s sustainable living standard per person (per equivalent adult ) is lower —$33,214 rather than $38,809. And because the couple now needs to insure a lower living standard for survivors, recommended life insurance is lower.

What if Hannah and Joe plan for a second child – to arrive four years out? This further reduces recommended insurance holdings. Indeed, ESPlanner now recommends very little life insurance for Joe. But since the ESPlanner knows that the second child won’t arrive if Hannah or Joe die before the child’s scheduled arrival, the program increases recommended insurance holdings once the second child arrives.

Table 4 considers college. It shows the impact of assuming that Hannah and Joe pay $20K per year for four years of college for each child. This raises recommended life insurance holdings, notwithstanding the immediate and permanent living standard reduction resulting from the couple’s need to make the college payments.

In addition to teaching us that more survivors doesn’t necessarily translate into more insurance, these examples show that the precise amount of life insurance one needs is very sensitive to the household’s demographic and financial circumstances.

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