Over the last few months, I’ve been writing about life insurance. I covered why life insurance is important, the best times to buy life insurance, and the pros of cons of whole vs. term life insurance (the two major types of insurance).

Today, I’d like to cover the basic question that many people ask themselves, “Do I have enough life insurance?” I’ll do that by using myself an example. Everyone’s life situation will be different and your situation will be very different than mine. However, maybe by reading my thought process, you’ll get some insight into what may work for you. As always, I recommend hiring a professional advisor to help guide you through specific personal questions you may have.

With that out of the way, let’s dig in. Time to play, “Do I Have Enough Life Insurance?”

How Much Life Insurance Do I Have?

You answer any “enough” question you need to two components: 1) the amount you have and 2) the amount you need. Calculating what you have is always easy. If you have life insurance, you probably have the paperwork around somewhere.

Because I’m married, I’m going to answer this question jointly with my wife. I personally have $500K of term (20 years) life insurance. It was bought before my oldest son was born. The idea behind it was that if I died, it would comfortably cover child care expenses until he was in college. When we had a second boy nearly a year later, we didn’t make any changes. Raising two children with $500K is not quite as comfortable as raising one, but it’s still a healthy number, right?

My wife has $400K of life insurance through her employer, the United States Health and Human Services. Unlike when we bought insurance for me, we didn’t add more life insurance on her. Why? We were told that adding life insurance on a pregnant woman wasn’t particularly feasible due to possible complications of the pregnancy itself. I don’t know if this is really true, but with $400K under our belt and enough other things to think about (“OMG we’re going to be parents!”) we let that slide.

How Much Life Insurance We Need?

In the previous articles that I mentioned above, the point of life insurance is generally about insuring against financial obligations if you die.

Above, I mentioned two financial obligations, our two sons. (I’m sure they love being referred to as that when reading Dad’s blog years from now.) At ages 4 and 5, we still have a long way to go until they are on their own, but it’s already flying by too fast. On the other hand, we got through the first quarter of raising them. When they go to Kindergarten, child care gets a lot cheaper. With either of our deaths the $400K or $500K goes a lot further now. The $400K, left uninvested, would be $28,500 for the next 14 years, which feels fairly comfortable given our frugal lifestyle.

The other financial obligation we have is our home. We need to pay our mortgage. However, I considering that a “necessary expense” just like, “We need to buy food.” We have a very low interest rate, 2.75% on a 15-year mortgage with about 9 years remaining on it. We are currently paying around $32,000 a year on it. The $400K or $500K could be used to essentially eliminate one of the biggest expenses – a place to live. There’s tremendous overlap between the costs of raising two boys and the biggest expense of a place to live for all of us.

In either case, I can see $400K or $500K being enough to “get to the finish line” with the mortgage and the kids to age 18.

Now this presumes that there would be no other income coming in. I’m not sure that’s realistic. Let’s take the two scenarios:

If I died, my wife would be able to continue to work her 6-figure pharmacist position. In a year, she’s eligible to retire from active duty with 20 years of service as a commander officer, which makes her eligible for a pension. I estimate that to be worth around $50,000 a year. She could retire and work part-time at a local pharmacy for some extra money if necessary. With my $500K of life insurance, she could continue to earn six figures without working much at all until the kids are ready to take care of themselves.

If my wife died, things would be tougher. I don’t know whether there is a pension for suriving spouses who haven’t reached 20 years of service. For that reason, I’ll consider the pension a $0, but when she does become pension eligible, we’ll have an option to insure that pension. This is almost a type of life insurance in and of itself. In the zero-pension scenario, I’d use the $400K as a bridge to get to the finish line (kids become 18 year-olds). I’m fairly frugal which allows me to stretch a dollar further than most people. While blogging and dog sitting aren’t very steady forms of income, I feel fairly confident I can bring in a combined $25,000 a year with them in bad years. I’d actively look for a more traditional job using my computer science degree that would pay a lot better. Right now, I value the flexibility of blogging and dog sitting to support my wife’s career.

This article is already long enough, but I’m leaving out two more pieces of the puzzle. We have some cashflow-neutral investment properties that I estimate will pay around $40,000 a year in 10 years when the mortgages are paid. So that’s another positive. On the negative side, I presumed the kids will not need financial support after 18, which isn’t likely. I think these cancel each other out or lead to a net positive in cash flow down the line.

Final Thoughts

Based on this, I’m thinking that it would be best to supplement my wife’s life insurance by perhaps buying an additional $500K policy on her. The wild card is the pension, which can make a world of difference. Once I understand the rules around her pension in more detail, I will be better able to decide how much life insurance I would need for income replacement.

The above article is brought to you by Midland National. You can read the latest Midland National News here. These are my own words and thoughts.

In personal finance we often say the best time to buy into the stock market was years ago… the second best time is now. For many people, buying life insurance is the same way. I should stress the “many” there, because not everyone necessarily needs life insurance. Let’s put aside “now” for now and get to some of the other best times to buy life insurance.

I think there are four major times in your life to consider buying life insurance. In my opinion one of them outweighs all the others. I’ll lead of with it because it’s when I bought life insurance:

1. When You Become a Parent

Creating and/or caring for very little human lives is kind of a big deal. After all, a career in baby modeling is kind of a long shot. They need someone to take care of them. Ordinarily, it’s a difficult job to do. It’s much more difficult if you are not living. Maybe a spouse or partner can do it, but they may need to work. That’s when it comes in handy to have a bunch of money around. Suddenly day care and babysitters are one less thing to think about.

2. When you Buy a House

As one real estate agent said to me, “A mortgage is an obligation.” I think he went on to say that if I died my estate would have sell the condo to pay back the bank. At the time, I was fine with that because I wouldn’t need the condo any more since I wasn’t living in it. However, what I didn’t know at the time was that the housing market was going to collapse. My property lost more 40% of it’s value. If I had died around that time, my estate would have to come up with the $80,000 difference.

Fortunately, I had decent assets in my retirement accounts at the time, so I decided against buying life insurance.

Double fortunately, I didn’t die and the housing market mostly recovered.

3. When you Start on Your Own

When you leave your parents’ nest and have to live on your own, it’s worth looking into buying a small amount of life insurance… enough to cover funeral services. The idea is not to be a financial burden on your loved ones. This came up in the comments of my previous article, and I dismissed it. My thinking was that you can always plan for a frugal funeral if that’s your concern. If you do that and keep an emergency fund of a thousand or two you should be fine. In fact, perhaps you have possessions like a used car that could be used to pay for funeral services.

I had some people say that I shouldn’t dismiss the costs so quickly. Out of respect for their opinions, I include this on the list.

4. When You Become a Parent (Part 2)

You’re not imagining things, this is a re-run of #1 above. However, in #1, I was talking about buying life insurance for yourself. Instead, I’d like to talk about buying life insurance for your child. It may sound silly buying insurance for a baby. I thought it was silly the first time I read about it here. However, take a minute and think about it. I know it’s difficult, because it’s essentially the worst thought to have in head. However, not thinking about it doesn’t make it go away.

What if you did lose your child? Would you be able to work? I can’t imagine that I’d be able to focus very well. If you have an understanding employer perhaps you can get some time to grieve. Money isn’t going to heal those wounds. However, it can buy some time to try to put your life back in order as best you can.

Can you think of other times that are great for buying life insurance? Let me know in the comments.

The above article is sponsored by Midland National. If you are in the market for life insurance they have a great BBB rating. Even though this is a sponsored article, these are my own words and thoughts.

I think I was around 13 or 14 the first time someone asked me about life insurance. My mother described a policy where I could pay some ridiculously low amount, I think around $6 a month for whatever the coverage was. The big question she had for me was whether I’d continue to pay it for the rest of my life to keep it active.

I like to think I was a responsible early teen, but I didn’t think it was wise to make such a commitment. I only had a very, very high-level understanding of what life insurance was. Looking back at it now, I’m happy I didn’t make a decision to buy back then. Even if I would have ended up saving money over the long haul (and I’m not sure I would), I am more confident in my ability to make financial decisions now than I was as a 14-year-old with limited life experience.

The next time I thought about life insurance was after I closed on my first condo when I was 28. At around the same time one of my good friends became an insurance salesman. He put together an in-depth analysis for me to review. The analysis made the point that if I were to die my estate would still be on the hook to make payments on the condo. However, since I was living there by myself with no dependents, I didn’t really care what happened to the condo.

Finally, at the age of 36, I found myself buying life insurance. What changed? My wife and I were expecting our first child. We both earn an income, but if one of us were to die life would be very, very difficult. In fact, raising a child by yourself and working seems impossible to me. I don’t know how some people pull it off. In an upcoming article, I’ll dig into what kind and how much life insurance we bought and why.

The financial support that life insurance would provide can make a world of difference. Money can be used to buy time, buy day care, camps/after school programs. It simply changes everything.

What’s disappointing to me is that I’ve read that too few people have life insurance. It makes sense to me as it isn’t the kind of thing they teach in school.

If you are looking for a place to get started with life insurance, you might want to consider Midland National’s awards or contact them through their LinkedIn account.

While the above article is sponsored by Midland National, these are my own words and thoughts.