How To Calculate Life Insurance To Protect Spousal & Child Support
Tim: So how would you suggest someone calculate the amounts of coverage in those types of scenarios. Does there any way to factor that at all?
Jon: If that’s this whole purpose of this specific policies, I mean the other life insurance need might be taken place, then it’s a fairly simple calculation which is looking at how many years that there would be and how much per month in doing the Math and saying, ‘Okay, if it’s $500 a month for X number of years in calculating that out that would be a starting point.’
Jon: Now that’s just to say that’s the alimony of the child support. That doesn’t mean that there is an opportunities especially when children are involved to say ‘You know what? I want to make sure that my children also have funding for their college education.’
Tim: Yes, I didn’t think about that but, yes.
Jon: And anything else or I want them to be able to have money to buy their first car, whatever it may be, regardless what happened between you and your spouse you don’t want the children to suffer at least financially and this is one way to ensure that, that doesn’t happen.
So the starting point is really, what is that monthly support, going to be times the number of months. But looking at some of these other issues are also important considerations.
Tim: So that’s just the very minimum, is the income portion? Let’s do a little bit of a Math.
Jon: Okay. I can do some Math.
Tim: Oh, I’ll make it easy.
Tim: Let’s say your spouse is paying a $1000 a month.
Tim: …for ten years.
Jon: Okay. So it’s a $120,000.
Tim: Okay. So if we took the very minimum, would you say $120,000 policy?
Jon: That would be the very minimum a $120,000 policy.
Tim: Now just to be covering that part of —
Jon: Well cover that part now recognizing your five years into it, and if you’ve already paid $60,000 of it…
Jon: So there’s a little bit of extra. But when you purchase a policy like this the assumption you have to make is what happens if something happened tomorrow?
Because that’s the worst case scenario and that’s what you have to plan for. So you can always make the decision later on to reduce coverage.
So if you’re getting close to the end and you don’t want to pay the full $120,000 you and your spouse can come to an agreement because remember your spouse is the owner of the policy.
So they have to agree to this.
Tim: Agree to this.
Jon: You may come to some other financial arrangement at that point to lower the coverage. It will only cover the remaining months.
Tim: Got you! So for purposes of the term of the policy in this scenario where we have some payment of $1000 a month for 10 years…
Tim: …would you say get a 10 year term policy? We’re talking term insurance.
Jon: Right, we’re talking term insurance. And again, if it’s only this issue, yes, because you’re my guest is that the ex-spouse isn’t necessarily looking to fund the life insurance beyond that.
So there might be some sort of one maybe when the children turn 18…
Jon: Maybe when the one child turns 18 at that point. Well even with that, again, what’s best for your children, what’s best for your financial situation.
I know it’s not an easy conversation to have it at that point in time.
Jon: …with the ex-spouse, so, yet this is the very minimum but you will get things like how easy will it be for the spouse to go back to work which he’ll be able to go back to work if something happened.
Jon: What is her living arrangement? Is she some sort of situation where she’s getting the extra money beyond that 10 years?
So all these things should be factor on both sides and when these decisions had been made, how long to purchase this policy for and for how much the whole situation should be looked at on both sides?
Tim: And just in general life insurance regardless of Divorce these are things you need to look at regardless…
Tim: …I mean spousal support or keeping things going for your wife for you kids college and…
Jon: Yes, I mean the hardest things you hear stories are and I’m sure you’ve heard these stories too where something happens is somebody you know and they’re going around to people where just to get money to borrow them.
Jon: I mean it’s just a really sad situation especially in most cases when life insurance isn’t all that expensive relatively speaking.
And it doesn’t benefit you or me if we’re the ones having ‘we-go’ but to known that my family is taken care of, is pretty important to me to know that my kids will still be able to do the things they wanted to do so even outside of the Divorce.
Life insurance is one of those it’s such a small investment for such a big potential benefit down the road.
Jon: And the worst case scenario, if you don’t use it? You don’t use it.
Tim: Yes. And you’re alive.
Jon: Yes, what a great scenario. We actually have policies that do return on premiums.
So if it’s out with it, they’ll actually give your money back.
Jon: There are policies like that now too.
Jon: So there’s —
Tim: No reason not to have it.
Jon: no reason at least not to talk to somebody about it.