If you were to die tomorrow, how would your family carry on financially?
Financial preparedness is especially important if you (or your spouse) are the sole breadwinner. According to the Bureau of Labor Statistics, in 2007 there were 58 million “married-couple families” in the U.S. In just over half of them, both husband and wife worked. That percentage has been falling ever since. The Center for American Progress found that in 2010 alone, more than 1 million two-earner married couples were reduced to one earner.
With more American families now relying on one income, it’s important to plan for the unlikely and unexpected death of the sole breadwinner. The last thing you want to do while grieving the loss of your spouse is sell the family home, get a second job, or impoverish yourself to pay for medical bills and living expenses. Here are some steps you can take now to help avoid a financial crisis during an emotional tragedy.
The Truth About Life Insurance
Most people have life insurance, and most life insurance policyholders believe they have an adequate amount of coverage. Unfortunately, many policyholders are wrong. Only a minority of surviving spouses describe their life insurance payouts as adequate.
The problem is one of perception. Many people have life insurance through their employer. Because these families know they have at least some insurance, they believe they’re prepared. But employer-sponsored life insurance is rarely enough to help a family maintain its standard of living. Once the life insurance proceeds are gone, most families with only employer-sponsored coverage have to start making serious changes in how they live and work.
Assess Your Needs
You can begin with an objective look at what your family needs right now to get by. Do you have dependents, such as young children, a non-working spouse, or parents? How much money do you need to pay the bills and send your kids to college?
When planning for a tragedy such as the premature death of a spouse, it’s particularly important to establish this baseline because a terminal illness could drastically increase your expenses. The death of your spouse also means the loss of that spouse’s health care coverage.
When considering how much life insurance you need, you should also factor in lifestyle changes you anticipate in the near future. Do you plan to have a baby or buy a larger home? Are your aging parents becoming increasingly dependent? Are you considering sending a child to private school? Perhaps you anticipate a more sophisticated lifestyle in the future as your income increases.
You can’t anticipate every future lifestyle change, but you can provide your family with life insurance coverage sufficient to meet their needs. You can review your policy riders, options, and beneficiary designations at regular intervals and purchase additional coverage or make changes as needed.
Evaluate Your Resources
Life insurance may not be your only source of support. Take stock of other assets that may be available to you:
- Investment accounts that can be accessed to meet the family’s changed circumstances
- Retirement accounts that can be earmarked for the surviving spouse’s retirement years
- College savings accounts
- Social Security Survivors Insurance (based on your spouse’s work history)
- Family resources (wealthy relatives who would be willing to release part of an inheritance early)
Understand Your Finances
Ideally, both partners should know where their money comes from, where it goes, how to pay the bills, and have an understanding of investment accounts. You should also understand your spouse’s employer-provided benefits. If you or your spouse has taken a backseat in the management of the family finances, it’s time to take a more active role. It’s better to learn your cash-flow picture now, instead of when you’re forced to understand at a time when it will be much more difficult.
Preparation is Best
A surviving spouse will have a lot of financial issues to address. It’s best to address them well in advance. A financial professional can guide you through the difficult questions you should ask to prepare for an event that, hopefully, will never occur.