Increasing Our Life Insurance Coverage

Between closing on our new home and dealing with our new expenses, we’ve learned quite a bit over the past month. We’re now turning our attention to our insurance needs and considering increasing our life insurance coverage.

We’ve been feeling as if we don’t have enough life insurance given our new financial circumstances. We thought it would be prudent for both us of us to have adequate coverage in case of an unfortunate event.

Estimating our life insurance needs

The first step was deciding how much we actually need. We’re not looking for a huge amount of coverage, but we want to be able to take care of our obligations should one of use die. We basically asked ourselves:

  • How much support would each of us need?
  • How long will it take to get back on our feet?

Since the main obligation is our new mortgage, we decided to get enough coverage to pay off the balance of the mortgage, cover our final expenses, and create a bit of a buffer. We figure our emergency fund can also help cushion us during the difficult time if necessary.

Term vs. permanent life insurance

Once we decided on an amount, our next decision was whether to buy a term life or permanent life insurance policy. Each has its own pros and cons.

Term life insurance covers you for a specific time (typically 10-30 years) with guaranteed level premiums. If you die during that term, your beneficiary, such as your spouse and children, will get the full value of the policy. Some benefits of term life are:

  • Cost: Term life premiums are cheaper than whole life insurance premiums because they don’t include an investment component.
  • Ease: It’s a pretty clear policy: if you die within the term of the policy, your beneficiary receives the policy’s full value.

The biggest problem with term life insurance is that once the term is over, you’re no longer covered (unless you get a new policy). Also, while you can always “buy term and invest the rest, ” many people lack the discipline to do this.

Permanent life insurance (including whole life, universal life, and variable universal life) doesn’t have a set term. Rather, it covers you as long as you pay the premiums. Some benefits of whole life are:

  • Cash value: Because a portion of your premium goes into an investment account, your policy accrues a cash value. In the long run, you can opt to have your premiums paid by this cash value, or to annuitize it as a source of income.
  • Credit line: If you’re ever in serious need of cash, you can borrow against the cash value of your policy.

A major problem with permanent life insurance is that it is very expensive, at least at first. What good is a life insurance policy that you can barely? Permanent life policies can also be much more difficult to evaluate because of the complexities associated with the investment component.

After looking at both the numbers and our goals, we chose to go with a 30 year term life insurance policy. We chose 30 years to protect each other and cover the mortgage.

Comparing policies

We used an online insurance comparison tool to get ballpark estimates of life insurance premiums for healthy individuals in their late 20s. We then looked at several life insurance companies to get specific rates. I also asked some friends and online buddies if they had any thoughts, problems, or good experiences with the companies they use.

We also contacted our local insurance company to see if they could offer a competitive rate on term life insurance. After checking around, we went with 30 year term life policy from our local agent with a face value of $150, 000. By opting for bi-annual payments, we also got a small discount on our premiums.

We now have a small health exam coming up and, assuming all goes well, we’ll be done (for now) with life insurance.

What do you think?

Do you have life insurance? If so, what type? And how did you decide how much coverage to buy? And how did you find your policy?

32 Responses to “Increasing Our Life Insurance Coverage”

  1. Anonymous

    @Darron: Eventually we would like to be self insured as you are. We have insurance to cover the entire mortgage as a big buffer. We’d rather have a bit more than not enough (especially with cheap rates) for an unforeseen death.

  2. Anonymous

    Matt – I can’t say for sure, but I think Zander was one of the websites I used in my research a few years ago. It sure looks familiar! The company I went with was Reliastar/ING (am I allowed to say that here?). Just out of curiousity, I entered the same info as when I bought my current policy (the age I was then) and the rate is now $405/year instead of $270 for a 31 year old non-smoking female! Holy cow, I thought I made an entry error, so I did it again – nope, still $405/year! I entered my husband’s info – the rate for his ($750K 20 yr term) only went up by $60/year to $380. Maybe we got a discount buying both policies together? I can’t remember, but I don’t think that was the case. More likely, their actuaries probably adjusted their formulas to factor in lower investment returns than before (resulting in higher rates). Glad we are locked in! We’ll have to make sure to never miss the renewal payments on those policies!

    Also – I agree, Aaron’s jab at you was unnecessary. But I wouldn’t worry about it if I were you – he’s just a salesperson trying to make a living in a tough economy. Aaron – you should have become an Accountant – there is still HIGH demand for CPAs!! (We are hiring now!)

    And BTW – Neither Aaron’s formula nor the rule of thumb would generate the right insurance needs for my husband, who stays at home. Neither takes into consideration all the extra costs I would have to pick up if he kicks the bucket, like several years of daycare/afterschool and summer camp costs for three kids (which we currently don’t have to pay). Too many people underestimate the value of a stay at home spouse, especially one taking care of kids!

  3. Anonymous

    Matt, my apologies. I wrote that rather quickly and didn’t know the third paragraph came off with the opposite of what I really meant. I’ll either heavily edit the intro or take the post down.

  4. Anonymous

    Sorry. I meant that the site he linked in his post (and on which he quoted my comment from above) was his site.

    I love this site, by the way. You should keep up the good work!

  5. Anonymous

    Aaron, I don’t think the sarcasm of my previous post translated well online, so I won’t use any in this post.

    You clearly know what you’re talking about. I don’t think the quote of my comment was necessary for you to get your point across, and I certainly don’t think your commentary about my effectiveness as an accountant was necessary.

    I do realize that it is your site and I did post on a public board. If that’s how you want to make your point, then more power to you.

  6. Anonymous

    I’m glad I could provide a little color to your article.

    Just so that I could convince myself that I’m not bad at my job, I went ahead and used your formula. I came out w/in $50k of my current coverage.

  7. Anonymous

    My refund last year was just 50%, so I certainly won’t bank on a 91% refund each year. I also consider it completely spent each month, so the refunds are just a nice little surprise when they come.

    I think that my initial math said that once I’m out of the 35-39 bucket I need to consider a 20 or 30-year term policy. I plan to use as a starting point for that search, and also consider the term policies now offered by AICPA.

    Do you mind sharing the name of the company that gave you $1m for $270/year? That sounds like a great deal!

  8. Anonymous

    Hey Matt – I’m a CPA also! I looked at that plan you are talking about. I’m in my 30s, and ended up going with something else (not with the AICPA discount). With the AICPA plan, the rates increase pretty quickly as you move through those “buckets” – as compared to the 20 year term rates for healthy 30-something year olds. I checked with my coworker, who has been participating in that plan for many years, about the refunds and she said they usually aren’t much (enjoy that 91%!! apparently that’s very unusual!). So I went with a 20 year term plan elsewhere – locking in $1 mill coverage on myself for $270/year ($22.5/mo) for as long as I have the plan. It is good to have options, though! And that AICPA plan is a good option for many – especialy since it doesn’t require a health exam! 🙂

    Now – I keep getting offers for reduced rates on car insurance for CPAs – I wonder how those rates compare with my current coverage….

  9. Anonymous

    I’m glad your article concluded with the selection of a Term policy. I’ve always thought that any sort of permanent policy is a waste of money.

    The rule that I was taught (and is mentioned in previous comments) about life insurance levels is “8 to 10 times income.” The purpose being that should a spouse die, the investment of the insurance proceeds could continue to provide the same level of income assuming a 10% return (if you can find that these days!).

    I’m in a fortunate situation. I’m a CPA, and the AICPA offers fantastic rates to members and their spouses. My wife an I have combined $950k life insurance, and pay just $24.60/month. On top of that, we receive a refund in years when the plan has favorable mortality rates. Last week we received a refund of 91% of the premiums we paid in 2009, which means that on average we paid about $2.21/month for $950k coverage!

    This is not a term plan, exactly. As you grow older, you move into different premium buckets. My wife and I are both under 30, so we’re in the least exepensive group. We’ll move through the buckets (30-34, 35-40, etc.) for a while, then switch to a true term policy (also offered by AICPA) once the math tells me it’s cost effective.

  10. Anonymous

    One major “need” for life insurance is wealth preservation, estate taxes can do a real number on the money passed on to your loved ones. Should you be fortunate enough for estate taxes to even come into play that is.

  11. Anonymous

    I’m currently single and I feel I am over-insured at this time. I have a policy from work for 1 year’s salary, and I have 2 $25,000 policies through KofC. With no dependents the only goal of insurance is to not leave anyone with a bill and no assets. When I bought insurance for my house they offered a term policy for the amount of the mortgage, but it was going to be ~$20/month for a $100,000 policy because i am diabetic.

    Insurance by definition is a transfer of risk to another party for a fee. My goal is to eliminate debt and generate assets such that insurance is no longer necessary. Eliminate the risk so that no transfer is necessary. My KofC membership gives me access to a new $25,000 whole life policy every 7 years throughout my life regardless of risk factors like health. My diabetes makes me very hard to insure so this is a good deal for me until I am in a position to no longer need insurance. By that time my first and second policies will likely be paid up and supporting themselves.

  12. Anonymous

    My partner gets life insurance through his job, equal to 2 year’s salary. That would be enough to pay off the mortgage, top off our son’s college fund, and pay all our expenses for about 3 years if it took me that long to get back on my feet.

    For me, I have a set payout plan my mom bought for a lump sum when I was a little kid. I actually borrowed from it to pay for one semester of college.

    Since I work part time, the insurance is significantly more than I make…about enough to hire someone to do the household work I do for several years.

    So we have never had to shop around for insurance. I did make him sign up for long-term care insurance when he took up rock climbing, though 🙂

  13. Anonymous

    I have 500K term life on myself. I found my company by shopping online. I just multiplied my income by 8-10. It’s a guideline given to me by a friend in the finance arena. I’m skeptical of cash value because of the commissions and hidden fees.

  14. Anonymous

    I think there may be a disconnect here. I believe that you only need the insurance for what you don’t have and/or cannot replace. If that is the premise, your insurance needs should go down as net worth goes up, at least in theory if your “lifestyle inflation” stays in check.

    Regarding the actual question, one should not cover the entire initial mortgage balance for the full term of the mortgage. Why? The balance on the mortgage is continually declining, assuming a fixed rate, P&I mortgage. Therefore, after ten years or so, the balance on the mortgage is maybe reduced by 25%, so there is no need for the full insurance value. At 20 years, there is even less need. My advice would be to determine at what point in the future the net worth can sustain paying for the mortgage (many other things should be considered, but the post only regarded the new mortgage), and only get insurance until that time. I conservative investor should get there within ten years, so ten years would be the term; again, all things held equal and no other factors to consider.

    In my life, I do not carry insurance even though I am only 43 years old. Why? I have a net worth high enough (not rich, just high enough) and no debt that my wife on her part-time job could live indefinitely and the kids (all in college) would get out of school debt free. That seems reasonable to me. If, on the other hand, I were to pick up some large debt, say a second home, and my wife would not sell it if I died, I may need some insurance to cover that debt if I were to die. I do not carry insurance on her since my income could sustain my lifestyle and take the care of the kids if she were to die.

  15. Anonymous

    Hi I am a life agent and as I enjoy your articles I thought I would give you some pointers for your health exams- these are just suggestions.

    The following items will help you to best prepare for your medical exam:
    • Abstain from food or drink-except water-for a minimum of 8 hours prior to your appointment (if medically possible).
    • Do not exercise (including weight lifting) the day of your examination.
    • Continue to take daily medications as you normally do.
    • Limit alcohol for at least 12 hours prior to the appointment.
    • Avoid energy drinks.
    • Avoid herbal products that could possibly elevate your blood pressure.
    • Get a good night’s sleep the night before the examination.
    • Drink plenty of water beginning a few hours before your appointment.
    • Wear a garment that has short sleeves or sleeves that can easily be rolled up for the blood pressure cuff.
    • Prepare to provide names and dosages of current medications.
    • Have available names, addresses and phone numbers of any doctors or clinics visited in the last 5 years.
    • Do not use any tobacco products for at least one hour prior to your examination.
    • Stay away from foods high in salt and cholesterol for 24 hours prior to your appointment.

    Good luck

  16. Anonymous

    @rb, make sure you understand the unique risk the life insurance company poses to your retirement plans. The potential swing in internal costs may have a larger effect on your net returns than you might realize. With long surrender charges and unknown future health, you could feel stuck in a policy you no longer want. I wrote about this over at Free Money Finance earlier in the month.

    If you’re still convinced this is the right thing for you, there are fee-only products that have lower surrender charges (or none at all) than the commission-based ones. You might want to check those out.

  17. Anonymous

    After some research, my wife and I decided to go with variable universal life policies. I believe that there is a lot of confusion and misunderstanding when it comes to these types of policies. Yes, it is a bit more expensive up front, but since are both young (mid 20s) we have (hopefully) a very long time for the investment account to grow. We have the ability to invest in a wide range of mutual funds, and can invest more than just the premium amount. Why would we want to do this? Because you are allowed to take a tax free loan against your earnings with no interest. So, essentially, the investment account is a Roth. I do not believe this type of policy is right for everyone, but given a long investing period the tax benefits significantly out weigh the higher premiums early on.

  18. Anonymous

    Vishal – I did all my research online, and got quotes via internet and/or phone. I didn’t meet anyone face to face until it was time for the physical. I did run across one agent who would not provide quotes for the preferred rate because (and I quote) “no one qualifies for those.” I wanted to call her back afterwards to tell her “I told ya so!” heh! Don’t work with the difficult agents – there are plenty out there looking for business and willing to work with you (for no fee – they get commission off of the product they sell you, if any).

  19. Anonymous

    This post could not have come at a better time.
    for Y2010 onwards, I chose not to sign up through my employer’s group rates for additional life insurance.

    my reasoning was/is that it’s much better for me if I get term life on my own so I don’t have to think about life insurance should I leave my employer (or get let go).
    one less thing to worry about.
    Another reason is that perhaps, I may get better rates if I shop around myself?

    so with this in mind, I was supposed to investigate and shop for some quotes this past december so that my new policy would begin Jan 1.
    It is now Feb 16th and I haven’t done anything about it!
    I wish I could buy insurance online rather than just get online quotes.
    I dislike speaking to individual agents/brokers and making multiple phone calls for quotes (not a people person, I guess).

    for ppl who have gone through this, is it as simple as calling 2-3 agents and making sure
    1) they are independent brokers so they can get quotes from multiple companies and not just from their affiliated firms.
    2) give them my info and how much I’m looking to buy and he/she can give me quotes over the phone along with their respective financial ratings
    3) how to deal with the said brokers after they’ve given me lots of quotes and then I have to tell them that no thanks, but I need to shop more?
    do they charge for quotes? or their time?

    reason I ask, one of my friends recommended a life insurance broker and after I talked to his admin, he wants to meet me for 1/2 hr first before he will even give me any quotes…

    like i said, I don’t like meetings………lol

  20. Anonymous

    This post is very timely. I also have been hunting around for life insurance (already have some through work, see below). I now has a wife (married in April 2009) and daughter (born in December 2009) to consider.

    I, personally, feel that too many people are OVER-insured. I ran some numbers for our situation. If I died today, my wife would be fine financially. I want to get enough death benefit to cover my funeral and help her pay off some existing debt. Otherwise, our monthly bills are easily handled by her income alone. My financial situation gets even better.

    Having said that, I am still looking for insurance. However, I am only looking for $50k or $100k (or whatever is minimum based on company and policy). Additionally, I intended on opening a term policy and a permanent policy, both for both of us. It’s cheap for us right now.

    There is also the option of staggering term life policies, if that’s what you want to do.

    And… best option for me: I’m on a group life policy at work for $500k for $11/month. The biggest downside is the “term” is the length of employment.

  21. Anonymous

    As a single person, I took out a term policy of $200,000 on myself. This is enough for my mother to pay off the private loans that she co-signed for, make final arrangements, and then have some cash for her and dad, and a sum to my boyfriend, since he and I live together and I make more. This prevents him from having to move immediately if something happens to me. Once we’re married we’ll have to sit down and really think about it, but until then this works well for me.

  22. Anonymous

    we did like you Laura – about $100K 30 yr term when we first got married and bought our first house. We had every intention of upping it when we had kids. But once we had kids, we just kept putting it off…until the oldest was 7! That was way too long – and I consider ourselves VERY lucky that something didn’t happen to either of us in those 7 years!

    When we did finally get around to increasing life insurance, the first thing I did was analyze our life and determine how much each of us would need, should something happen to the other one of us, in order to support the family at the same standard of living until the last kid is 20. (I love spreadsheets!) That number came to $1 million on me and $750K on him (do NOT underestimate the value of a stay at home spouse!).

    Next was choosing companies to get quotes from. The biggest concern I had was longevity and financial stability of the company. You want a company that will be around and will be able to pay a claim if you have one. What good is “cheap” life insurance if it doesn’t pay out?? AM Best rates each company’s financial stability – I narrowed it down to several companies with a good history and the highest AM Best ratings.

    Term vs whole life was a no-brainer. Whole life is a rip off – a forced savings account that pays rock bottom rates, created for those who don’t have discipline to save on their own, or for those who fall victim to a good insurance sales person. Given that the youngest of our kids was already 2, we opted for the 20 year term. Granted, those policies will be way too much coverage for us in the last 10 years, but in researching policy costs for 40-something year olds (when we would have to renew if we had chosen 10 year term with intention to renew at lower levels after 10 years), I am confident that we took the route that maximizes our coverage needs for the lowest costs in the long run (for the companies I narrowed it down to anyway). Total cost for our policies is under $600/year (we pay one payment for both policies yearly) – I can’t say for sure, but I think it came to $320 on his and $270 on mine (“super preferred rates,” or something like that – yay for good health when you’re still young – can’t count on that in your 40s either! Heck, I’m not sure I would qualify for super preferred rates anymore NOW! Dang cholesterol got out of whack! Kind of baffled as to how/why b/c I’m not overweight, don’t eat junk, don’t smoke, and I exercise regularly. hmph – go figger!)

    Anyhow…Sorry for the novel – but life insurance is not easy and something that *I think* most people don’t put enough thought into. Glad to see you aren’t like most people 😉

  23. Anonymous

    It’s always interesting to see how other folks go about their search. One of the things I encourage people to stop doing is trying to distinguish between “term or whole life”. In most cases, this choice is driven by the confusing framework the life insurance industry gives, instead of focusing on consumer choices.

    Since cash value inside of a long-term financial instrument with high surrender charges isn’t high on most people’s shopping list, they are only interested in what they pay for the death benefit. Getting down to the root of your goals helps rip through a lot of the confusion the industry presents for you. Knowing what you want makes choosing easier. Then you can compare any type of life policy for the guarantees you have and the cost of mortality (instead of investment).

    Glad to hear you’re almost done! I know it can be a hassle sometimes.

  24. Laura: Something else to keep in mind is inflation and future lifestyle changes. Is $150k going to be enough years down the road? Unlikely, but at least you’re young enough that it will still be cheap to find a new, bigger policy (assuming you remain healthy) when the need arises. For example, I don’t know if kids are in the cards, but if they are, you will likely want/need significantly more coverage once you are supporting a family.

    We just upped our coverage a couple of years ago with a new 20 year term policy (we’ve done this a couple ot times in the past as our needs have changed). We picked the 20 term because by then our youngest son will be through college and on his own, and we will no longer need much in the way of coverage (especially since our house is now paid for). Also, given our age at the time we bought the new policy (mid-30s) the 30 year policy would have been much more costly.

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