Term Life Insurance Protection

Situation:
Steve (age 34) and Ashley (age 31) have been married for 5 years and just had their first child 8 months ago. Steve is a consultant at Firm XYZ and Ashley was an Elementary School teacher but has stopped teaching to stay home with the baby. Together they have decided that Ashley will be staying out of work for a few years to raise their family. Steve and Ashley have begun discussions of their finances and have become concerned regarding their life insurance coverage.

Analysis:
Term insurance is a great option for this young couple to consider, at least to start out with. It will allow them to have the proper level of coverage at the most affordable price. They want to make sure that if either of them dies prematurely, the surviving spouse will be able to maintain a similar standard of living. The primary concerns are to pay their mortgage, fund their child's college education, and provide a continuous income stream. To assess the need for life insurance they should look at each of their goals:

The balance of their mortgage is about $250,000, and will be completely paid off in 18 years.

In order to provide funding for college education, they assume an average cost of $30,000 per year for a 4–year program, which equals a total of $120,000.

They would like to maintain a steady income stream of $40,000 per year, knowing that Social Security will provide a separate amount also. Based on our methodology on How to Maintain an Income Stream, this goal will require approximately $1,000,000 of assets.

In addition to this, the surviving spouse would also be eligible to receive Social Security benefits until their child turns 18. They can assume between $30–40,000 of Social Security benefits per year.

Once they have added up the necessary assets needed to satisfy their goals, they can then subtract any existing assets they have that can be used upon death. This should allow them to arrive at the amount of life insurance needed.

Although Ashley is not a breadwinner, she is providing a service to their family that has great monetary value. If Ashley were to die prematurely, Steve may have to work fewer hours and earn less income in order to provide care, or may have to pay for daycare. In either situation, there is a need for maintaining an income stream, even though she is not a breadwinner. Assuming that they both want to have the same level of coverage, and based on these goals and assumptions, they should each have $1,370,000 of 20 to 30-year Term Life insurance. This amount can be reduced by the amount of assets they have that can be used in the case of a premature death.

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