The effect of life insurance after the death of a breadwinner can be interesting to observe. I guess it would be best to first look at the situation without life insurance. A hypothetical example may also help.
Jim is age 42, married and has 2 children ages 14 and 16. Jim started a little late as he wanted to prepare for his upcoming family. His wife Alicia is age 38. Jim developed terminal cancer and was quite aware that he didn’t have much longer to live. Alicia Never worked because she felt she wanted to focus on raising the children.
Jim and Alicia were doing quite well. They had talked about buying life insurance but never seemed to get around to getting a program started. Jim is devastated because he is very aware of the problems the family will have after he is gone. They have a savings account with about $40,000. They were thinking of college education for the children when they started saving.
Upon Jim’s death that money will disappear very quickly if he has no life insurance.
Picking Up The Pieces
On the other hand let us suppose Jim and Alicia were smart people. They did plan ahead. They have a pension plan and, fortunately, they have life insurance. Jim has $2,800,000 20 year term insurance on his life and Alicia has $500,000 of the same type policy on her life. The policies on Jim’s life will first pay off the mortgage upon his death and in addition to that provide sufficient income for the family to live not only till the children graduate college but for as long as Alicia lives.
Alicia insisted on her policy because she felt that if she should die prematurely the funds could go to pay a qualified nanny to help raise the children. That is a good idea.
Upon Jim’s death everything will go smoothly. Alicia is quite capable of managing everything efficiently. The mortgage will be paid off within 6 months. The life insurance companies used a life income option with a 10 year certain payment period, just in case Alicia should die before the children graduate college. They will continue to live in the same house. The children will go to the same school and still have the same friends. Jim will be missed by his family but he will always have a special place in the hearts of his wife Alicia as well as their 2 children. They will know he cares.
This is an actual, real life, case. I just changed the names. Jim is terminal but is holding on.
