Reader Question: How Much Life Insurance Do You Need?
Published on - February 26th, 2010 (Modified on - February 9th, 2012) (by J.D. Roth) This is a guest post from Sanford Ellowitz, a New York State licensed insurance agent. He has over 25 years experience in the insurance and financial services industries. He’s also a Certified Financial Planner and a Certified Employee Benefit Specialist.
Penny recently wrote with the following question:
I’m interested to find out how one sets out a financial plan for life and how much insurance does a person really need because there are so many insurance plans, some are regular savings, some are a combination of investment linked insurance. How much does a person really need and what type of insurance does a person on a budget need the most?
J.D. asked me to write about this since he isn’t an insurance expert himself, so I’ll give you some ideas about how much and what type of life insurance you need, but first let’s start off by helping Penny set out a basic financial plan for life. Once you get some planning done, you’ll have a better idea of your life insurance needs.
Starting down the winding road
Think of a financial plan as a roadmap for a life-long journey. Your starting point is where you are financially right now. Begin by listing all your assets, such as the equity in your home and your savings accounts, and then subtracting what you owe, like the balance of your mortgage and credit card debt. This will give you a good idea of where you stand.
Once you’ve figured that out, think about your future obligations, such as getting your kids through college, saving for a comfortable retirement, achieving your goals, and making dreams a reality. You can find online savings calculators to help you estimate how much you’ll need to save for each of these, from a trip around the world to a little place on the beach to spend retirement.
Where does it all go?
Next, it’s time to gather all of your bills for the last few months so you can see where your money goes. This should include everything that you’ve spent money on — period. Be honest about any seemingly small expenses, and make reasonable estimates. You may be surprised to find out how much you’re spending on things you may not need, like eating out or your daily espresso habit.
Make a budget that includes enough savings to meet your obligations and goals, and — this is the really important part — stick to it.
Insurance is your contingency plan
When it comes to insurance, first you need enough to at least cover your obligations in case something happened to you tomorrow — that’s your base line. From there, it’s time to look into the future and prepare for what’s coming down the pike. Don’t underestimate how much you need. If your kids will be starting college ten years from now, you need to cover what it will cost then. (And it’ll probably cost a lot more than it does now!)
After that, you can decide what type of life insurance is best. Term life insurance is the cheapest, but it’s exactly what it says it is. If you get a term policy for 20 years and find that you need coverage after that, you’re out of luck. You’ll have to apply again, when you’re older and maybe not as healthy. Also, if you outlive the term of your policy, you don’t get anything back. Betting against your own longevity to save money may seem like a good idea now, but you might end up kicking yourself — or worse — down the line.
Permanent life insurance, which comes in different flavors (such as universal, variable, or whole life insurance) provides coverage for as long as you live, so you know there’ll always be a payout. Each has different savings features and can build up cash, which you may take or borrow against. The same coverage will cost a lot more than term life insurance, but you can count on it always being there.
Your bottom line for life insurance
Since Penny is on a budget, term life insurance sounds like the way to go — right now, anyway. She should make sure she has enough coverage for as long as you need it. Later, when her situation changes and she can loosen her belt a little, she may want to get some permanent insurance. At that point she’ll be able to take full advantage of its savings features, as well.
Remember, insurance is there for when things go wrong. It might mean the difference between putting your kids through college and putting them up to their eyes in debt, if something were to happen to you. It’ll be important for you to keep remaking your budget and comparing insurance plans as things change in your life, as they always do. Don’t worry, though; it gets easier every time. Just remember that insurance is your way of playing it safe, no matter the odds.
J.D.’s note: I’ve done more reading on life insurance since I first asked Sanford to answer Penny’s question. I actually think term life is the best choice for most people (but not everyone). There’s certainly no shame in taking out a term policy. If you think you might want permanent insurance down the road, look for a convertible term policy, which will let you switch over.
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I generally loathe hybrid insurance products that incorporate a “savings” feature, the returns are most often anemic, the policies are cost prohibitive, and cash strapped policy holders often draw down the value during hard times leaving very little for their beneficiaries. Term policies are the product of choice. I’ll have to research the convertible term policy. I like the idea of becoming self-insured eventually as espoused in The Wealthy Barber.
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Asking an insurance agent to advise you on insurance needs is a bit like asking the fox to lay out the security plan for the hen house. Only the fox might have a conscience.
Seriously, to suggest that an average person should consider ”permanent” insurance, some of the worst financial products on the market, is irresponsible.
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I actually taught a college course some years ago in life and health insurance. I’ll make a few brief observations:
1) Often, the most critical need is not life insurance but major medical and long term disability insurance. Frankly, it’s much cheaper to bury you than to care for you should you become injured or otherwise incapacitated.
Next, there really isn’t anything like “permanent” insurance. In a whole life plan, for example, if the insured dies they get the cash value refunded and anything over that is the “insurance” portion–which obviously decreases as the cash value builds. The only thing “permanent” about it is the incredibly high price you pay for this kind of policy.
Many term plans offer a rider guaranteeing reinsurability, but obviously at the age when the new term begins. Thus, premiums go up–but presumably so has your income.
Conversely, very often the actual needs decrease as time passes by. By the time someone is retired and any kids are long grown and gone, there may actually be little need remaining for life insurance.
It is also a very bad idea to get “credit life” on real estate purchases–often the worst rates around, but a big money maker for the mortgage holder. If you’re worried about meeting mortgage obligations on behalf of your family, increase the amount of term coverage correspondingly. After all, paying off a mortgage may not be the best use of the money should you or a significant other pass away.
Term insurance has become far cheaper in recent years, and can represent a fantastic value. It makes coverage during the expensive early startup years of a family far more affordable. If you couple it with a really good savings plan, you can build up your own “cash value” outside an insurance program and have it for emergencies as well as for eventual retirement. Do it starting early enough and keep with it, and far before you are at retirement age you won’t need insurance coverage so much anyway.
I hope this helps…
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This is something that my wife and i have been looking at since the beginning of the year. we have have heard that 8 to 10 years of household income should be the coverage amount.
We realize that it’s a contigency should anything happen, but being on a plan to get out of debt, we also want something we can manage and sustain and therefore term life is our choice. As David noted, after the coverage term kids will be out of collge and possibly gone from home.
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One of my goals for the beginning of this year is to get additional term life insurance for my wife and myself. For the reasons stated above I’ve decided against whole life. I’d rather put the difference in premiums into a Roth or other investment.
As for the amount, I consider basing it on a certain number of years of salary to be the wrong way. I am basing the amount on what would provide the remaining spouse with financial security. 1) enough to pay off all debts. 2) enough to cover long term financial obligations (kids college, etc. ). 3) enough to supplement salary for living expenses after debt is gone. Then there is the question of how much uncle Sam will take which will as much as double the amount if they tax insurance payouts. I need to look into this.
We are in our early 30s and both are professionals. My plan is to carry term life for 15 years at which time our mortgage and all debts will be paid off, our daughter will be close to starting college and we will have that completely funded, and our retirement and other investments would be able to cover any supplemental salary the remaining spouse would
need.
Please let me know if I’ve forgotten anything in this calculation.
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I think this post does a great job answering the question “How much life insurance would your life insurance saleperson like you to buy?”
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I would to see the answer to the question: how much insurance makes sense? with some specific examples based on different life stages and circumstances to help determine the appropriate amount.
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There is an adage that summarizes the criticisms of permanent/whole life, which is a huge rip-off.
“Buy term and invest the difference.”
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The article would have been better with a warning on how the writer makes his money, selling you insurance. This motivation alone eliminates his inherent credibility regardless of how honest of a person he may be.
I agree with JD on the term insurance. Anything else is a waste of money. You can generally determine the best product for yourself by how much the agent gets in commission. The less commission the less profit the company makes and thus the better deal for you (all depending on if you need it in the first place).
Also, when did it become a requirement to pay for your child’s education? This is one of those clever tactics by salespeople to tug at your emotions and buy something you don’t need. Because if you don’t your child will end up with student loans just like the majority of people. I am not saying it would not be nice to pay for their schooling but is this the best use of your money today?
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I agree: I have never understood why people will put themselves up to their eyeballs in debt, or deplete their own retirement years, to make sure their kids go through college without even having to have a job. Maybe it’s just my perspective; I was an older than usual college student and through working part time (full time in summers), student loans, work-study, and a couple of grants, I managed to get both a BS and an MA degree. As a single parent, to boot. I looked around at the students whose mommies and daddies were paying their way, and saw a bunch of shallow partiers who were taking up space that thousands of poor students would have given their left arms to get.
Now an almost-60 years old widow, I’m thinking I don’t need life insurance. I can gift my son up to some (I forget) amount annually without his paying taxes on it, and he can stash it away for my funeral, and his expenses of getting rid of my house, etc., when I die. Why would I keep buying life insurance?
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JD, is this a sales pitch for “whole life insurance?” It is a completely biased assessment.
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*sigh*
Permanent insurance is one of the worst products on the market, any insurance agent who wants the best for his clients should know this.
As a general rule term life insurance for 7 – 10 times the income of the main breadwinner is the way to go, it’s very inexpensive.
Also we aren’t told (unless I missed it) whether Penny is single or has any dependents. If she’s single I’d suggest she doesn’t need any life insurance at all.
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“The article would have been better with a warning on how the writer makes his money, selling you insurance.”
@Tim: How much of a warning do you need? JD posted this at the top of the article:
“This is a guest post from Sanford Ellowitz, a New York State licensed insurance agent. He has over 25 years experience in the insurance and financial services industries. He’s also a Certified Financial Planner and a Certified Employee Benefit Specialist.”
I do agree with you that Term is probably a better deal. However, I was glad to get some information from the other side. Also, the beginning of his article was very good information. If you don’t have a plan and a budget (whatever it might look like), you don’t really know what you should consider for insurance in the first place.
As to paying for a child’s education, it’s a personal choice. If you were going to set aside some money anyway, this helps you do that even if you aren’t around. Plus if you die while they are in college, this helps them get through the next semester or so of tuition w/o having to focus on finding loans or scholarships while they are grieving. It’s not fun to think about but it’s probably even worse to go through. Plus, you pay pennies on the dollar essentially. So if the difference between having enough for the kid to only have to pay half of their schooling vs all of it is only a few bucks a month, why not? The insurance company isn’t making an insane amount of extra profit off the extra money just cause you want it for your child’s college tuition.
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I actually think rules of thumb, or even more detailed analysis using fancy software, are just a good start to have a conversation with your loved ones about how much is important and why. Nobody can tell you the exact right answer. Once you have the “why” figured out, your goals and specs you are shopping for become a lot more clear.
Focusing on things like “term” or “whole life” too early frames your thought process in the way the life insurance industry wants you to. These are just tools. Figuring out which tool to use before you understand the purpose doesn’t make much sense.
I am unimpressed this article contains sentences like, “Permanent life insurance… provides coverage for as long as you live, so you know there’ll always be a payout.” This is simply not true in enough circumstances to state it with such confidence. There are plenty of permanent life insurance policies which are not guaranteed to last. How guaranteed you want *your* life insurance plan to be should be part of your discussion before you talk to a sales agent.
Understand your goals first and then just pay attention to what fits – you’ll be surprised how much easier it is to make up your mind.
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As usual, everyone is just blinded by one’s own opinions and what one reads in the press..Here’s a few examples of why you need certain types of insurance..
Examples of temporary insurance
1. Buying insurance to cover your mortgage should you pass away.
2.If you are 100% sure that in 20 years time, you will “make more” than you do now – in life there are no guarantees.
Examples of permanent insurance needs
1. You have a disabled child and want to buy life insurance in a “special needs trust”. The need is permanent, it does not go away in 20 years.
2. You have a 8 or 9 figure wealth and want to make use of your generation skip tax exemption to pass on wealth tax free to the next generation.
Come on folks, stop this permanent insurance bash. It really depends on your situation. Not everyone needs an iPhone, or a blackberry, but you do not go bashing phone salespeople do you?
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Ditto on #5, ‘I think this post does a great job answering the question “How much life insurance would your life insurance saleperson like you to buy?”’
I thought the heuristic was: unless you’re old and trying to avoid the estate tax because you’re super wealthy, term insurance is the only thing you should buy.
Here’s a couple of less-biased links to answer the question:
1. Motley fool: http://www.fool.com/insurancecenter/life/life.htm
2. cnn money (note #2): http://money.cnn.com/magazines/moneymag/money101/lesson20/
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Dang it… moderation for links on this site now too? I shake my tiny fist at spammers! Just in case it takes weeks to get out of moderation (like on some other sites), here’s the post again:
Ditto on #5, ‘I think this post does a great job answering the question “How much life insurance would your life insurance saleperson like you to buy?”’
I thought the heuristic was: unless you’re old and trying to avoid the estate tax because you’re super wealthy, term insurance is the only thing you should buy.
Here’s a couple of less-biased links to answer the question:
Google: motley fool life insurance
Google: cnn money life insurance
In fact, I think it would be a great idea to get the motley fool guy to write on this topic too, maybe give an alternate perspective.
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Just enough to cover 10 years worth of your liabilities, so that in case you die, and your spouse/fam have to assume, they have 10 yrs to figure out how to make more money or sell the asset and move on.
What about this strategy?
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Am I the only one who thought this post was seriously lacking? I was excited to see it pop up in my inbox because my husband and I are expecting our first child, so life insurance is high on our list of to-dos right now. While the explanation of what the difference between term and whole-life policies basically are, that’s pretty much all that’s here (and I’m pretty sure it’s been covered on this blog before, too). Why is there so little discussion of how to figure out how much one should consider carrying? All we get is: “When it comes to insurance, first you need enough to at least cover your obligations in case something happened to you tomorrow — that’s your base line. From there, it’s time to look into the future and prepare for what’s coming down the pike. Don’t underestimate how much you need. If your kids will be starting college ten years from now, you need to cover what it will cost then.” That’s it? That’s all the guidance your 25 years in the industry can offer? I’d managed to figure that much out on my own – I was looking for more guidance on how the average person can actually calculate these things in a reasonably straightforward way. Even a rule of thumb – such as X times your salary or whatever – would have been helpful.
I’m rather disappointed.
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@ KJ – I agree. too broad of a posting. I would have liked to see some specifics
@ Sanford – You mentioned that “if you outlive the term of your policy, you don’t get anything back”. You may want to touch based on Return on Premium term life policies where you receive the full principle at the end of the term. Yes, it’s significantly higher than regular term but it can also serve as a forced savings plan. Dual purpose – life insurance and savings.
Cheers,
DMB
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I am married with no children of my own. My husband has 3 daughters (2 in college). We each get $25K in life ins. from our employers and that’s all we have. We have no mortage and under $8K of debt (car loan). We have enough liquid assets to pay for a funeral outright and wait for the life insurance proceeds. One of our salaries can handle our monthly bills so we didn’t see any sense in paying for any additional life insurance.
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Wow, JD, you win the Internet for worst article ever published! I mean really, explanations like this
“such as universal, variable, or whole life insurance…” are of absolutely no help. The insurance agent is just trying to implant vocabulary in your mind that you’ll have to ask another agent (who will actually sell you something). Smart agent, terrible personal finance blog!
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I have a policy that is mostly term but will switch slowly over to whole life, but that’s because my mom died of a genetic, dominant, neurological illness when she was 46 and there is a 50% chance that I will also have this disease (not that I told the insurance company that – I told them the name of the disease she died of, but it’s super rare and I don’t think anyone looked it up before they approved me for the policy). I don’t want to get genetic testing because I don’t see the point, but if I do have it I don’t want to be uninsurable when a term policy expires.
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@ Mr. Credit Card – a special needs trust is a legal document, not life insurance. The way to take care of a dependent person is to set up a trust and fund it through your assets. You can buy a term insurance policy in case you die before it’s fully funded. Buying these bad investments like variable annuities and whole life policies will only sap your assets and result in a smaller trust.
JD – what happened? You have posted much better blogs on insurance before (see http://www.getrichslowly.org/blog/2009/04/28/an-introduction-to-life-insurance/). To any lurkers or new readers, this is an anomaly – it’s normally a very good site!
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As a single 49 yr old woman, I don’t bother with life insurance. I do not have any dependents to worry about and my money can go toward the Long-Term Disability insurance through my work. I have free life insurance through my work at 1x my salary as long as I’m working there. That’s enough to bury me and take care of my house until it’s sold.
My family can use my savings (there is a co-signer on my account) to bury me before any policy pays out. Also, my family knows if they spend more than $3000 on my funeral, they spent way too much.
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JD, I’ve been reading your blog for a long time, but have never commented before. Generally I am very happy with your content, but I think this article does a disservice to your readers. While I believe there are a small percentage of people who can benefit from whole life policies, they don’t make sense for most. I recently bought a 30-year term policy and it will last me until I am 58. By that time I’ll be nearing retirement and won’t be supporting children any longer. I think it is best to get a term policy for what one needs and invest the difference in an appropriate retirement account.
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I’m not sure I’ve ever seen any educated person on a financial blog actually advocate purchasing anything more than a term life insurance policy.
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It sounds like a consensus; most agree that term life is the way to go. This makes perfect sense. Any insurance is a bet. The bet is that you will die during the period of the insurance. You are betting you will, the company is betting you won’t. The bottom line is that we all die. We just don’t know when, hence the bet. Therefore Whole Life/Permanent insurance is a bad bet. What company would sell such a product knowing they are going to loose? Answer: the company that is giving you a decreasing term policy while they take your additional money to build up your “savings” which they simply give you back when you die. They invest that extra money and give you a VERY small part back as interest. In the end the policy pays out your own money.
Why would you want insurance if you know you are going to loose? I have term insurance to replace my income should I die before I retire and because I am married. I want my wife to keep chugging along even if I’m not there producing income. I have six kids, but they are all grown and have families of their own. They all paid for their own college BTW. If my wife dies before me, I will cancel the policy. When I retire, I will cancel the policy. When I win the lottery or the return on my savings exceeds my work income, I will cancel the policy. My insurance only exists to replace my income for my wife should I die before I retire. As I get older, more and more of my debts are becoming paid off. Therefore, as I get older, our personal cost of living decreases and more of my income is going into savings of one form or another. This means less of my income is necessary for day to day living.
How much insurance do you need? If you want your family (i.e. dependants, not adult children) to continue living in the style you’ve afforded them you need to be able to replace your income if you can no longer provide. I believe the industry standard is a 10% return on investment. If you make $50k/year and you wanted to replace that you would need $500k invested so that your family could live off the interest. Therefore you would need a $500k term life insurance policy. You also need to account for existing savings and equity, stuff you already have. Others can debate whether 10% is the correct figure, but that’s the basic formula. It’s not rocket science.
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I think we all agree that there are some situations that call for permanent insurance; however, some of us know they are the exceptions, to the “rule” of term.
I would say that for most people “term and spend the difference” is still probably better than permanent insurance. Permanent insurance is just so much more expensive than term and most people just don’t need it.
Another way to look at it is, you can get more term coverage per dollar than permanent coverage. If you can’t afford to get as much coverage as you need with permanent insurance (since it’s so expensive) then you are certainly going to be better off getting the right amount of term coverage than the wrong amount of permanent coverage.
I disagree that you have to have your whole financial life in order just to get life insurance. That sounds like a recipe for never getting around to it. See also “the perfect is the enemy of the good.”
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Yikes. Looks like this article hit a nerve. For the record, I’m a strong proponent of term life (as you’ll see in the book), but admit my knowledge is limited. I thought an expert would provide a better viewpoint, but maybe I was wrong.
Look for a follow-up when I return from Belize; a GRS reader sent me a guest post this morning that does a much better job of addressing the question.
Again, my apologies.
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Here’s a formula I just designed to decide how much insurance to get:
I = 25 * (E – S) – N
Where
I = needed insurance coverage
25 = 1 / 4% (safe withdrawal rate)
E = Expenses (start with your current expenses, including contributions to savings, retirement accounts, debt, college savings etc. Make adjustments for you not being around, expected future increases, etc.)
S = spouse’s income
N = current net worth
With both the spouse’s income, mortgage, and college savings – my philosophy here is that just because you’re dead, doesn’t mean your family will totally stop functioning forever and be unable to work/take out student loans/etc. Your death is not supposed to be a windfall, it’s just a catastrophe you are trying to protect your family from.
Once I have calculated I (for both self and spouse) I would then round it up to the nearest 50 or 100k (to cover burial expenses and allow some time off to grieve. just not the rest of my family’s lives.)
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I agree with what appears to be the majority of the commenters so far:
1. This post contains horrible advise for most people -I am definitely a fan of term insurance and the post is written from a VERY biased perspective.
2. Setting that aside, there is hardly any “meat” to this post at all and does not answer the question posed in the title. There are no rules of thumb, examples, links to insurance calculators, etc. There is just general info about knowing your net worth and setting budgets and a spattering of key words. And what was the “no college, up to your eyes in debt” guilt trip???
Sorely disappointed.
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Suzanne – yes, SNT is a legal document and very often fund by life insurance unless the parents have lots of money to start with. But the point is that the needs of a disabled child or family member is permanent. Can’t buy a 20 year term cos what happens if you outlive that? Then you have to keep paying premiums _ higher ones off course. The person whom the trust is meant for still needs insurance, hence the need for permanent insurance.
Obviously one can start with a term that is convertible and convert when when they are able to.
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I think some good points have been made here that lead back to a principal of any insurance. I have term through my employer at a reasonable rate. I can buy up to 6x my annual salary. Since our expenses are well below our income that should be more than enough to cover my family should something happen to me (which I know because I did the whole “sit down and figure it out” that the writer advocates”). It is only a few dollars per month and it’s convenient, so I don’t worry about it, but ultimately I plan to be self insured. In other words I plan to have enough savings that I don’t need insurance as I get older and premiums increase. By the time I hit the age where premiums start rising dramatically (40-50 timeframe) I should have enough assets to not worry about life insurance. At that point I may drop it entirely or shift my focus to insurance that will protect my assets, like long term disability.
But I would like to say that I think some of you are being pretty harsh on this guy. I doubt he will get business from writing this post and JD said he asked for it. It isn’t thick with information, but it seems to be an honest effort to be helpful.
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JD, from an insurance person’s perspective I actually think this is more balanced than what I have heard from most insurance people, so don’t beat yourself up too much.
Insurance Rules:
#1: Don’t mix insurance which is meant for protection with investment which is meant for wealth creation. Permanent life insurance is a lousy investment product and only is valuable if you have big wealth that you want to pass on to your heirs and avoid the estate tax. So for most here, not relevant.
#2: Term life is a great product because it is an ultra competitive product and serves a purpose. If you die when you have dependents and you are the breadwinner, they are taken care of. If you are in your 50s and you’ve been living below your means, have house paid off, have an nice retirement and investment account, you no longer need any insurance. You’re self-insured at that point as your assets can more than cover your liabilities.
#3: Amount. Most insurance people will get you to choose a far larger amount than you need. They will tell you that you need 20 years of income. Well, guess what: life insurance proceeds are non-taxable so 10 years in a lump sum equates to about 20 years of actual income after taxes.
Get term life insurance and re-up it for 20 years when your in your mid 30s so you are covered into your 50s.
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I actually just took out a term (20 years) policy on myself. It made sense to me because it will give me the most bang for my buck during a time in my life when we’ll need it the most. Our son is 3 months old. I’m 37. I took out enough on myself that my wife can live on the interest reasonably and have the principle if she needs it for bigger things down the road like putting our son through college. Later, if I make it (hopefully) past 20 years, getting him through college will not be a big thing and my wife may be working again by then. Later, if I think I need it, I’ll buy more. For me though, it’s about covering my family’s costs without me – the source of income. And I think of it just like car insurance – if we need it, it’s there, if we don’t need it, no worries.
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It seems to be a pattern this week in PF blogs of great titles that don’t deliver what they say they will. There were two earlier in the week at Simple Dollar, now this one here. Blog authors: I do appreciate that you provide free content, but please don’t manipulate me by naming your post something really cool and interesting, only to *not actually answer the question* within it. Sigh…
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I would respond to Suzanne’s comment (#2):
I disagree that permanent insurance is a poor financial product. My neighbor, who is an insurance agent, uses universal life insurance primarily as an investment vehicle and says that the coverage it affords is of only minor interest to him. Sounds like a pretty decent financial product.
I can perhaps appreciate, however, that one might hold a negative opinion of whole life insurance (not universal) because of its great cost.
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I thought this article read a bit more like a sales pitch than a useful algorithm. I’m sure we can count on J.D. to follow up with more substance. My contribution:
DH & I have term life in amounts sufficient to 1) pay off all debts; 2) replace our two old vehicles with a new one; and 3) cover rent for a year. We have no kids, thus no other obligations than to each other.
Each of us works and is capable of paying all the regular expenses on our own once our debt is gone, so we needed enough insurance to take care of that.
If one of us dies within the term, the survivor is not going to want to maintain two old cars and a motorcycle. Much better to get rid of those and get a fresh new car; thus the insurance needed to cover that as well.
And as to rent, the survivor would probably choose either to get a roommate or to move to a smaller apartment, but neither of us would want to be forced to rush into that decision – so the insurance needed to cover that for a while, too.
Maybe that example will help those who were looking for an actual answer to “how much insurance do you need.”
btw our total premiums at ages 44 and 50 amount to less than $60/mo and we purchased our insurance through my bank and my employer.
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While I agree term is the way to go for many people, there are circumstances, as have already been pointed out by others above, where a permanant insurance product can help you.
That said, I really would have liked to have seen some examples with options for comparison (to include order of magnitude costs). Sure, the poor insurance guy writing the article would still get flamed, but at least we could point to specific areas to discuss instead of the same old argument. I think it would lead to better education for all.
For many folks I think insurance needs change over the years. So they could be different at 20, 30, 50, and 65, running from nothing needed, to need gobs, to needing a bit, to nothing again. I’d be curious how to match those needs to actual market products, good or bad, versus just basing insurance for thirty years on whatever salary I’m making. Hence some general example might be nice.
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Also, one word of warning for those getting insurance from an employer. If you leave, get fired, etc. typically the insurance lapses unless you take pains (if you even can) to maintain it. So I would consider having a policy not dependant on your current employment.
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Getagrip has an excellent point; however, in our case DH somehow managed never to get term life on his own. The only way I could get him covered so that *I* am covered if he drops dead, was to cover him myself through the employer.
We also have accidental death and dismembership insurance through my bank, and for that I was able to buy a policy covering him. Most life insurances, the actual covered person has to apply for and purchase the policy.
Also, “term” being what it is (inexpensive coverage with an expiration date known well in advance) it’s best suited to couples like us, in which both work, and have retirement savings in other vehicles.
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First, you should not need insurance if you are single. Second, for those with families / dependents, here is a summary of how I got to the “formula” of how much insurance to carry. I calculated what we owe (for us it is only a mortgage), the household expenses for the # of years until the kids are gone, and the cost to hire someone to be Mary Poppins if something should happen. That is the amount of insurance I took out for my spouse. For me, I have double that insurance amount as my spouse is not the best with money. Really….it is so cheap to get a term policy that more is better.
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I am looking into life insurance right now. As a matter of fact, I have set up a meeting on Tuesday to talk with my auto and home insurance agent.
In any case, if I died today, my wife would be able to support herself on her income alone. I only intend on buying the smallest policy ($100k for 30-year term) just to help her out a little after I die. We have a newborn daughter, but she’s paying her own way to college. Period.
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IMO, getting anything but term life insurance for your families needs/debts is a waste of money.
I agree with some people above, asking an life insurance agent which is the best insurance is trying to beat a pool shark in a billiards hall with half a pool cue.
I think future articles on something like life insurance should be guest written by an consumer advocacy group in that domain, not by the vested interests.
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I would like to see a more in-depth article that addresses more complex questions like:
- Is it ok to have multiple policies? I have 3, would I be better off having one?
- Some insurance requires a medical exam – is this worth it? What are they interested in? I only know that they wanted me to wait all day at home (on a week day missing work!) and be prepared to give blood, so I picked different insurance that was only a tiny bit more expensive.
- What are the chances of being killed or permanently disabled in a car accident – my credit card offers $7/month insurance with payout of $100k for this ($500k if it involves public transport) – does this sound worth it?
- If I die how long do they typically take to pay out? I don’t want my spouse grieving + having no money for months. Maybe this needs an extra emergency account or special insurance?
- What are the typical costs of burial? Cremation with no service?
- What is a good deal on $500k insurance for an average 30-year old non-smoker with no health problems? I’d love some numbers.
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Life insurance should only be a temporary thing while you are in your 20′s & 30′s. I’m 28 and my wife is 24. My wife will graduate this year and start earning an income. We have enough insurance to cover the house and her student loans (we don’t have any other debt and vehicle is paid off).
As we gain net worth our life insurance plan will go down. You insure yourself while you are younger because you have debts and obligations but when you’re older your house should be paid off and plenty of other investments along with cash on hand will cover things
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Steve #31 – We think alike!
Meep #46 – Getting a medical exam is definitely worth it for life insurance. If you buy insurance that doesn’t have one then it’s possible they can do the research after you die and conclude that they don’t have to pay out.
See step 4 http://www.ehow.com/how_5350532_decide-exam-life-insurance-right.html
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@Meep
To answer just a couple of your questions.
- The $7/month for 100k sounds like accidental death & dismemberment insurance. it is quite unlikely to be a good deal.
- Watch out for policies that don’t require an exam. Sometimes they are post-underwritten which basically means, they will wait until you make a claim to decide if you were worthy of the insurance in the first place. If they decide you weren’t, all your beneficiaries get is the premiums you paid! You only have to get the exam once for a 20 or 30 year policy, just suck it up
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@ Hildebrand, insurance agents want you to think that universal life is a good investment. However, in reality they’re a very poor investment choice. The fees are high and the returns are low. If the insurance is not the point, then invest in a low-cost index fund. You’ll come out ahead in the end.
Insurance agents like the author and your neighbor don’t ever mention that you get lower returns because the agent gets a huge commission for selling them.
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