Last year, Gallup published the aggregate results of their 2001 to 2015 Economy and Personal Finance survey Opens in a new window. A whopping 73% of parents with children under age 18 said paying for college was their top money concern, a number that dwarfed all other money worries. For comparison purposes, in adults without children under 18, only about 50% could agree on a top financial concern (paying for retirement), and of those 65 and over, only about 40% had an identical financial worry (catastrophic medical bills).
American parents may not be able to agree on a lot of things when it comes to raising their kids, but it seems they are nearly in unison when it comes to their chief financial fear.
Protect your college savings plan with life insurance
Sallie Mae estimates PDF Opens in a new window that 60% of parents with children under the age of six are actively saving for college, a figure that jumps to 64% for parents of children ages seven through 12. That's up from just under 50% two years ago.
And the future looks good for young families with formal college savings plans in place. The same Sallie Mae data found that nearly two-thirds of parents born after 1980 felt confident that their savings plan would be able to meet their college savings goals.
But what happens if the college savings plan falls apart due to the unexpected death of a parent? It's a tragedy that happens more often than you might expect. Although exact numbers are difficult to pin down, studies suggest that about one in 20 children Opens in a new window loses a parent before the age of 18.
That's where life insurance comes in. For parents with young children, it's the ultimate risk management tool. Life insurance can be designed to help cover all the anticipated gaps in your emergency savings, retirement savings, and college savings, as well as paying off your mortgage and providing an income for your family if the unimaginable happens.
Most parents do recognize the need for life insurance, but they seem to have an unrealistic idea of exactly how much coverage they need. A third of parents with children under the age of 18 have $100,000 or less Opens in a new window in life insurance, generally in the form of employer group coverage. Only about 44% of U.S. households Opens in a new window purchase an individual policy.
In fact, the Life Insurance and Market Research Association PDF Opens in a new window (LIMRA) found that, of those families with individual life insurance coverage, the average coverage amount was only about three years of income replacement, far below recommended levels. About 40% of parents with children said they would face immediate financial hardship if a primary breadwinner died, and another 30% said that they would be unable to meet basic living expenses a year after a parent died. The average coverage gap for living expenses alone was about $200,000.
And that's before college expenses kick in.
The soaring cost of college
So how much should you account for in college spending?
Over the past two decades, college costs have risen, on average, nearly 200% Opens in a new window compared to just 53% for the Consumer Price Index during that same time period. It's a whole new world compared to when your parents were saving for your college education.
Financial advisors today project the average per-year college costs at a public university will be about $54,000 PDF Opens in a new window in 18 years based on a 6% average annual inflation rate in higher education. That figure jumps to $120,000 per year at private schools. It's a huge chunk of cash no matter how you look at it.
Bridging the insurance coverage gap
Given those astronomical figures, you're not alone if you're having trouble figuring out how much insurance you need. The LIMRA study quoted above showed that 60% of parents didn't know how much coverage they should buy to protect their families.
Another 80% said they didn't buy adequate coverage because they had other financial priorities — but when asked to estimate the cost of the coverage they needed, they guessed a figure three times higher than what an adequate life insurance policy actually costs.
Although each parent's coverage needs will vary, there is a basic formula you can use to estimate your family's financial risk if you die unexpectedly. Kevin Brayton, executive vice president of Prudential's individual life insurance division, suggests six to 10 years of income replacement as a baseline. From there, add in specific needs such as college savings, minus any existing amounts you've set aside, to get a solid estimate.
But don't think of life insurance as a one-and-done exercise. It's a good idea to review your coverage needs at least every two years; they may go up or down depending on the amount of money you've set aside for college, other assets you've built up, and the balance on your home mortgage, for example. A financial planning professional is your best resource to help you calculate your exposure and cover your risk with a life insurance policy.