Why is it vital for young families to have life insurance? Because the loss is greater than you are likely aware.

 Parents with young children are generally looking to maintain their family’s standard of living in the event of their premature death. Insurance basics show us that for young families, the income earners have the highest need for life insurance. That’s because their families standard of living is based on their paycheque – their annual income. If we pass prematurely, your family loses your income.

However, here’s the nonintuitive part – it’s not just your income, but your income over time. If you pass away when your children are still financially dependent, they haven’t lost the buying power of your paycheque for one year. They’ve lost it for many years. And your annual income, times the number of years until the kids are financially self-sufficient, is likely a HUGE number that needs to be insured.

For example, if you’re 40, earning 75K/year, lets say your family actually needs about $60K of that income to survive. If you passed away tomorrow, you could conceivably need to replicate your income for 15 years before your children are self-sufficient. 15 yearsX$60K (ignoring interest and inflation) is $900,000 of income needed. In practice – using interest and inflation – we typically find that most young families need to insure the parent’s income for 10 to 15X their gross annual income. That amount would ensure that if you passed away tomorrow, your family could continue their current standard of living until the kids are on their own financially – and that’s it; no money left over. 

Two key takeaways here. First, you should first and foremost life insure the parents earning income. Secondly you likely need more coverage than you would think intuitively.