A Growing Family's Life Insurance Needs

Steve in Chicago and his wife are expecting their first child, and she lost her job last year. How much life insurance should they carry now that the family is growing?

QUESTION: Steve in Chicago and his wife are expecting their first child, and she lost her job last year. How much life insurance should they carry now that the family is growing? Dave explains.

ANSWER: You should have about 10 times your income on you. Since your wife doesn’t work outside the home now, I would probably put $300,000 or $400,000 on her. If you died and she put $700,000 in mutual funds, it would create $70,000 a year in income. We’ve replaced your income. She could make it just fine. If she passes away, you’ll have to hire Mary Poppins. You’ll need to have some help. This woman does a lot of work, and I can visualize that costing you—that person or persons assisting you with the raising of your children while you continue with your career—$40,000 a year.

I’d do 20-year level term with the idea that you’re going to have this house paid off in 15 years even though it’s on a 30-year. You’re going to be working toward being debt-free. You’re listening to me, and you’re going to be building your retirement, and your children are going to be growing up and leaving.

Twenty years from today, the child you’re expecting will be 20. You might do some 30-year level term, or you might just do some 20-year level term if your wealth-building does not accelerate more rapidly than normal people. The idea is that your kids will be grown and gone before your insurance lapses. With no debt and a pile of assets, your need for insurance goes away. You become self-insured.