How to Protect Your Family Against Unexpected Change

When an unexpected death or disability occurs, a family may have many changes.  If a spouse dies suddenly, the total family income may be reduced drastically, leaving the surviving spouse with a reduced income and increased expenses.  During this uncertain time, life insurance can reduce the worry of increasing financial expenses, says Geoffrey J Thompson

Increased Expenses

With the loss of one spouse, even if the family income does not change, certain expenses may increase significantly, such as:

  • According to the U.S. Department of Agriculture, a child born in 2013 and raised to age 18 will cost $284, 570 to raise.  This amount does not include college costs.
  • Depending on the region, the age of the child, type of operator, and overall quality, childcare costs can range from $3,997 to $12,781 per year.  
  • College tuition, fees, room and board, and other expenses related to continued education are estimated at $20,090 for a four-year public college to $45,370 for a four-year private nonprofit college.

If a family has more than one child, these expenses can quickly mount leaving a surviving parent with the problem of paying these expenses on their own.

In addition to expenses related to children, added expenses from the average traditional funeral can add thousands of dollars in expenses to the mix.  According to the National Funeral Directors Association, the average cost of a funeral in 2014, including embalming and a metal casket, was $7,181.  Cemetery services, including a grave marker, headstone, vault or liner, and the gravesite can add an addition $3,000 to $4,000 to this amount, bringing the total to well over $10,000.

A Family’s Earning Power

The ability to earn an income along with all other sources of income are a family’s earning power.  A person’s income combined with a spouse’s income, investment income, and other income, such as Social Security benefits, constitute the earning power.  A 30-year old couple has the potential to earn $3.5 million by age 65 if their total family income averages $100,000 for their entire working careers.  This does not take into account any raises during this time.

Even for young couples who only make $50,000 yearly, a $2 million earning power is attainable.  This amount only increases with years of age 65 and average yearly income.  For example:

  • A 35-year-old couple who has a yearly income of $250,000, has an earning power of $6,250,000.
  • A 50-year-old couple with a yearly income of $500,000 has the potential earning power of $7.5 million
  • Astoundingly, a 25-year-old couple with an average yearly income of $250,000 has the potential earning power of $10 million.

With so much earning power available, it is important to protect the sources of this income in the event of death or disability.  In some cases, the death or disability of a key contributor to the earning power in a family increases certain expenses such as childcare.

Facts About Social Security Benefits

With a cap on the amount of Social Security benefits a person can receive monthly, it is a good idea to understand how Social Security is determined and distributed.

  • The money received by a family after a person dies is called Social Security survivor benefits and is based on the earnings history at the time of death.  This amount is limited to a maximum family benefit.
  • A surviving spouse can receive benefits at any age if they are taking care of a child who is receiving Social Security benefits and is younger than age 16 or disabled.
  • Children who are younger than 18 (or 19 if they are attending elementary or secondary school full time) and unmarried can also receive benefits.  Any child can get benefits at any age if the child was disabled before age 22 and remains disabled.
  • A surviving spouse may be able to receive full Social Security benefits at full retirement age.  The retirement age changes based on the year a person was born.  For example, the full retirement age for survivors is age 66 if the person was born between 1945-1956.  This age gradually increases to age 67 for people born in 1962 or later.
  • Reduced widow or widower benefits can be received as early as age 60.  If the surviving spouse is disabled, these benefits can begin as early as age 50.
  • The “blackout period” is the period of time when a surviving spouse is not eligible to receive survivor benefits.

Purchasing Life Insurance on Family Members

Financial needs arise during different times in the growth of a family.  Education, retirement, and childcare are a few of these expenses.  By purchasing life insurance on family members, a disciplined program for retirement, education, and other financial needs that may arise is implemented.  A secure source of income is retained in the event that a spouse or child is uninsurable at a later date.  When purchasing cash value life insurance, cash value accumulates and is available for future financial needs.

If a spouse or child dies prematurely, funds will be available for:

  • Final expenses such as hospital or medical costs, funeral costs, and legal fees
  • Child care and housekeeping assistance
  • Replacement of lost income and continuing asset protection
  • Time away from work
  • Handling major expenses, such as college education or mortgages

A Family Coverage Action Checklist

To ensure that a family is completely covered, a financial analysis can:

  • Identify cash needs and increased expenses that arise at the death of a spouse or child
  • Show income needs and sources of income at the death of a spouse
  • Determine additional capital required to satisfy determined needs
  • Show the benefits of establishing a life insurance program for the children

Implementation of a life insurance plan involves:

  • Selecting the type and amount of life insurance coverage needed
  • Establishing insurability of all family members
  • Arranging for payment of premiums

Planning for the future and protecting loved ones during the uncertain time of the death or disability of a family member ensures that a family can focus on each other instead of income changes or increased expenses.  Discuss your life insurance needs with a qualified financial planner to give you and your family that peace of mind.

Continue Reading: Managing Your Income, A Personal Finance Review >>

Geoffrey J Thompson is the CEO of Accelera Innovations, Doyen Elements, and Synergistic Life Services. 

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