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Life insurance questions
DFA reader Anthony asked:
Here is a quick time line of my past year or so:
- December 2008: My then-girlfriend, now-wife, and I purchased a house. The mortgage is $165,000.
- April 2009: I got married.
- December 2009: My first daughter was born.
So yes, my last year has been a very quick-pace and exciting one. But for the last couple of days, I have been thinking about my life… and life insurance. I know that I need life insurance, this is not a question of “whether or not.” The questions are: how much? what type (term vs. permanent)? should I get some through work or somewhere else? In my hunt for knowledge, I found a few things out. First, the “how much” ranges anywhere from -$200k (that’s a negative dollar value) to $1.3M. The top end ($1.3M) comes from a 20x salary rule of thumb. The -$200k comes from a fancy online life insurance calculator: It implies that my wife would be completely self-sufficient without me, and this is actually true. If I died today, she would have grief and pains and her lifestyle would change (of course!), but her income would pay all of the bills. That being the case, I have seen tons of PF bloggers talk about $1M+ policies. I definitely feel that this is overkill.
On the other hand, $50k is the minimum policy most (?) companies offer. I even walked through my numbers with a State Farm agent: According to that exercise, I would get $200k. Where do I fall in? What number should I go with? (I know that this is a personal, “comfort” level question, but I am curious about everyone else’s response.)
Second, term vs. permanent? The PF world feels that term is the way to go: You can invest the difference in premiums on your own and come out ahead. After some research, many people seem to like permanent. Then again, I could always take two policies out for one of each. What should I do?
Third, getting insurance through work or through other means? My job offers me a plan for $500k for about $11/month. That sounds great, but their insurance policy lapses when I am no longer with them, not when I die. So if I don’t die before I leave the company, it’s not worth it, despite it’s incredibly low rate. On the other hand, life insurance companies are more expensive for a smaller death benefit. However, I am covered, regardless of my job status. Also, I remain insurable if I hold any type of policy with a particular company. My thought is to max out my company’s plan, which would leave me over-insured, but it’s so darn cheap. But also, I want to start a policy elsewhere so that I can remain insurable. What do I do here? What are yours and the reader’s opinions on these questions?
How much life insurance should I purchase? 2. Should I get term or permanent insurance? Or a combination of both? 3. Should I max out my company’s plan? Should I go with a plan outside of work? Or should I do both? Thanks, Anthony.
Life insurance – What type and how much?
Anthony, deciding how much life insurance to buy can be a tough decision to make as proven through your own personal experience. There are many options and choosing the best life insurance for you and your family can be tough. First, let me say: there is no “right” answer. The many different options to weigh:term vs. permanent life insurance, 30 year vs. 20 year, third party vs. employer, are all a moot point. The fact of the matter is: get some sort of life insurance to make sure your family is taken care of.
I recommend term life insurance
Personally, I’m a HUGE fan and consider term life insurance the best choice for many situations. That’s the way I go and that’s the way I recommend to my clients. Whether you purchase $500,000 of term life or $1,000,000, what you pay per month/year on the premium is trivial compared to the benefit to your family in case of your unexpected passing. It’s just too simple of fact, term life insurance is cheap to buy.
As I read over your situation, I could relate as I went through the same process. When I first married, I bought a $250,000 30 term policy. After we had our 1st child (about 2 years later), I added an additional $500,000. Recently, we just built our first home, had had our second child and; with me just turning 32 (ouch,) I didn’t want to take the chance of having go through another life insurance medical exam and run the risk of being denied or have my premiums shoot weigh up. I opted to tack on another $1 million term policy.
Here are a few of the things I based my decision on:
You can take a look at a post I did, how much term life insurance do you need to buy, that uses the same rule of thumb that you found (20x your salary) or is based on a needs analysis. The needs analysis main focus is to provide an income replacement for your spouse while you’re gone, not just to pay off any current debt or funeral expenses.
The logic I used in my amount was that I wanted my wife to have at least an $80,000 per year income if something happened to me. Based on a conservative number of earning say 5% on the money and if invested, that should do just that. Is $80,000 a year excessive? A single mom raising two kids that needs to last her the rest of her lifetime- I would say not. Plus, the premiums are extremely affordable.
If you want to take out some permanent life insurance to give you some peace of mind, then go for it. At your age, I wouldn’t necessarily advise it. Here’s a look another look at what is better, permanent vs. term life insurance.
Company insurance plan – Should you max it out?
Your company’s plan is an option, but I wouldn’t have it be your main focus. What if you lose your job? What if your company goes belly up? What happens if this happens when your 45 and forced to get life insurance when you’re older. By going through an outside carrier, you’ll never have to worry about it.
To play devil’s advocate to myself, $11/mo for $500,000 is cheap. I’m pretty confident though you could find an outside carrier that would offer something equivalent.
Remember: Be sure to shop around! You would be amazed at the difference that one insurance company will charge over another.
As usual, be sure to review your insurance needs on a periodic basis. $1.3m might seem like a lot of life insurance today, but five years for now it might not be enough. That’s exactly what I thought when I had $750,000.
Matt’s note: Anthony, I agree with Jeff. For our family we also carry term life and believe it to be the best option by far. I carry more insurance on my wife than on myself and make sure her coverage is commensurate with how well I want her to be taken care of in the event of my death.
*Investors should carefully consider the charges and fees associated with a new insurance policy as well as any costs associated with surrendering the current policy.
*Jeff Rose is a registered with and Securities offered through LPL Financial, Member FINRA/SIPC.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, please consult your financial advisor or local insurance agent.