Life insurance

takmjs · October 2013

I'm not sure whether to add term life insurance to what I currently have, as well as whether to drop my whole-life life insurance policy.

I have a policy through work for both myself and for my husband. He's a farmer (works on his dad's farm), so he obviously doesn't get insurance through work.

For me, I have the basic term plan which pays one year's salary ($40,000). I also have a supplemental plan, which pays a year's salary. My policy for my husband is for $20,000 and it also covers children at $10,000. My work pays for the basic plan, I pay $2.64/month for the supplemental, and $3.50/month for the spouse/dependent plan.

When I went to our normal insurance agent right after my daughter was born (January 2012), he suggested I get the whole-life policy. It pays $100,000. My husband also went to the same agent, and he also got a whole-life policy worth $100,000. That costs us $1,000 a year each.

Some additional things about our finances: We do not have a mortgage, since we live in the farm-house (which is completely paid off and owned by H's parents; they live in a different house a mile away), and we own a rental house which we paid cash for. I put in 5% into my work's retirement plan, which they match. We also max out our Roth IRAs each year, and I'm putting $1,000 a month into a 403b. My graduate student loans were paid off last year, and the only loan I have out now is a car loan, which is at 0% interest rate, so I'm not paying ahead on it.

Thoughts? I see so much about how you should never buy whole-life, and you could invest that money elsewhere. That's sort of what I'm thinking--that I could get a better return on it elsewhere (mutual funds or something else?). Do I need to get more term insurance? Where is a good place to look for term insurance? (I'm not really liking my current agent.) When I looked into the cost of term insurance, it seemed rather expensive, especially as I get older. It was cheap now, but the policies I saw were for 20 years max, and then at age 50 (when the new term would start), it would be more than I'm paying for the whole-life policy now. Do the whole-life policy premiums increase with age?

Thanks for your advice!

chicagobride_07 · October 2013

We just went through purchasing life insurance for my DH. We were advised to get life insurance for 8 to 10 times his current salary. A thirty year term was also available, but it was significantly more expensive (almost double) and 20 years should take us through our daughter's education and into retirement.

To give you an idea of what costs might be for you when you are older for a term policy- DH is 45, good health, but has high cholesterol. A 20 year, 1 million dollar policy is costing us ~ 1,600/year through a major carrier.

We did not look into whole life. We've had minimal policies with our employers (1-2X salary only) since our 20's (very inexpensive), but since our daughter entered the picture we decided to get a medically underwritten policy independent of work.

maple2 · October 2013

I am definitely not a life insurance expert. We received similar advice to get coverage for 8 - 10x each person's salary. Your situation sounds a bit unusual, so it may make more sense to think through what you want that money to cover for you. In our thinking (we have 2 kids) we wanted to be able to make all the monthly payments we currently have without the 2nd person's salary for as long as we need to as well as have extra money to provide the surviving spouse with flexibility to take time off, hire addition help, relocate, whatever would be necessary to cope and adjust. The bulk of our monthly budget goes to child care and the mortgage, neither of which would decrease with the death of one of us, and it would be challenging/stressful to meet those costs on a single salary, especially while dealing with the loss. We included the remainder of our mortgage, plus a monthly cushion until the kids graduated that would help cover their regular expenses plus lost savings for retirement and college. The life insurance advisors suggested also covering the full cost of college for both kids, but we felt like that was a bit much for our needs.

We went with 30 year term insurance. My understanding is that although term rates increase dramatically when you are older, most people don't need the insurance as much when they are older, so they either reduce the coverage or discontinue it entirely because their mortgages are paid off, they don't have dependent children, they have already contributed to retirement accounts, etc.

hoffse · October 2013

I wouldn't do whole life, especially not at the amount of coverage your're looking at. In the big picture of life (no pun intended) you will likely be paying a ton of money in premiums for a relatively small pay-out.

The amount of life insurance you need depends on a combination of debt and number/age of children. With young children you need enough for your spouse to replace your income through childhood and into early adulthood, and you may want enough to help with college. This often means 8-10x your annual salary apiece, if your children are very young (yours is). If you have additional debt (which you don't, but for others who do), you probably want enough to also pay off any mortgage, student loans, etc.

To give you some perspective, H and I are currently childless and house-less (we rent), but we each have - or in H's case will have once he begins working - a $200K life insurance policy through work, plus $500K on top of that for each of us. That will cover student loan debt for both of us, burial expenses (often $10k-$20k), any mortgage we might acquire in the next year or so, any car loan we might acquire in the next year or so, and some extra for bereavement in case we would want to take a few months off work. Granted, we have a LOT of student loan debt, and if one of us dies we want to be able to pay both of our loans off, so we need more than most childless/houseless folks. We are young enough that larger policies are relatively cheap, so we decided to go ahead and buy everything we might need between now and children - which includes coverage for a mortgage we don't yet have. Our policies are for 10 years.

Once we have children we will probably each buy an additional $1M policy, because one of our goals is to be able to afford a tier-1 private college if they can get in. H and I both graduated from schools like this, and it's something we'd like to be able to give our children if their academic records are strong enough. Problem is, by the time they're ready for college it looks like these schools might be in the 6-figure range per year. So we would need more life insurance to swing that on a single income if one of us were to die. If we have more than one child, we will buy more insurance.

One of the reasons whole life is a bad deal is that if you live long enough and if you have saved for retirement, you really don't need life insurance when you are older. By then you have (hopefully) minimal or no debt, your children are (hopefully) off your payroll, and you have a large source of savings to tap into at an appropriate age. My parents just recently cancelled all their life insurance because they have way more than they will need in savings, and I am no longer sucking them dry for cash each month... My dad just turned 60. My mom is 58. Hopefully they have 30-40 years left. It would be senseless for them to pay for a whole life policy (or for term life for that matter) for the next 30-40 years when they no longer need it. Yes, term life does become more expensive as you get older, but if you are appropriately saving for retirement you may not need to buy an old-folks policy, or you can cancel that sucker if you do.

Insurance people will try to sell whole life to you because the premiums are a lot higher OVER THE COURSE OF THE AVERAGE LIFE since they last until you die. They don't increase with age, but if you never cancel it you might be paying $500/year until you die at age 90. If you bought that policy at age 30 then you are paying $30,000 for a $100,000 pay-out. That's a bad deal, particularly when you consider inflation.

Think about it - if you never cancel whole life, then your loved ones are guaranteed a pay-out at some point. Thus, insurance people have to make the premiums much higher. Whereas with term life the insurance people are betting you live (hence the lower premium) and you are betting you die. Odds are, the insurance people will NOT be paying your loved ones when you buy a 10 or 15 year policy in your 20's and 30's, and that's why they can make the premiums lower. All the people who live subsidize the people who die on term life. It might sound callous to frame it that way, but it's what happens.

My suggestion is to buy more than you need while you are young and term life is cheap - lock yourself into a 10,15, or 20 year policy and re-evaluate your needs as your income changes and your children grow. Hopefully you live long enough to buy a second term-life policy when your first one expires. 20 years from now that term life will be more expensive since you will be older (and thus the likelihood that you will die is higher). However, your income will have probably gone up by then as well You could buy a 10-year term life at age 50 and that really ought to last you until you retire if you save enough. Or maybe a 15-year if junior shows no signs of moving out of your basement

Point is, term life will probably save you money over the long run if you are saving for retirement in the way you should be.

hoffse · October 2013

And I should add:

H pays $150/year for a 10-year $500K policy

I pay $125/year for a 10-year $500K policy (H tried cigarettes when he was younger... sigh. And men are more likely to die in a car accident than women because of that lovely thing we call road rage. And testosterone.).

In other words, $1500 TOTAL for H for a $500K term life policy and $1250 for me TOTAL for a $500K term life policy. That's a much better pay-in to pay-out ratio than $500/year for a $100K whole-life policy that you were quoted (I'm assuming you each pay $500/year since you said both policies cost you $1000/year).

For you, 10 years costs $5000. So you are paying 3x more for a policy that pays you 5x less than what you might get with term life. That's because they assume you keep paying in until you eventually die someday and they are forced to pay on the policy.

Granted, I'm 27 and H is 26. You didn't say how old you are - but I'm betting that with a baby you're still relatively young. If you're in your 30's the difference between our policies might not be as big as I'm estimating above, but they will still be significant. I would calculate how much your premiums would be overall for a 10 or 20 yr term life vs. continuing to pay your premiums fpr 10 or 20 yrs of whole life. My guess is that what you would save with term life during your 30's and 40's makes up for the higher term life premiums when you are in your 50's, especially if you are only paying until retirement age.

brij2006 · October 2013

Here's my point of view on it, and my dad is a farmer and I wrote his life policy.

If your H will at all be taking over the farm at some point and time, and you would be aquiring that debt, then I highly advise for him to get a term policy for the amount of the value of the farm. This way if anything were to happen to him, you could pay off the farm debts. Example: My dad owes about $500k on the farm land, and he has a $1mil term policy. My mom does not work, and if anything were to happen to my dad, then my brother would take over the farm and cash rent it from my mom. But this way my mom could pay off the debts, and have enough money to live for a little while until the cash rent starts coming in.

Also be sure to factor in the cost for daycare. If anything were to happen to you, then your H would be solely responsible for the cost of daycare and college tuition (and vise versa). Make sure you have enough in term insurance to be able to pay for those items. Example: We both have $100k whole life policies (to pay off mortgage, student loans, and cars), but once we have our child then we will likely both get $500k term policies. Since we know that we couldn't afford the cost of daycare on top of everyday expenses (even with all debt paid off). So that is something to think about also.

What I usually advise to people is this:
1. Add up all of your debt.
2. Then take into consideration any upcoming expenses within 20 years (college tuition, childs wedding, school costs, daycare, etc)
3. Multiply your income by 7.

= What you would want for a term policy. So for us, we owe about $100k in debt, want about $300k to put aside for #2, and #3 is $280k. So I should have enough insurance for $680k. I have a $100k whole life policy, and will do a $500k 25 year term for the other items that have a "time limit" to them.

As far as whole life insurance, the biggest thing I recommend is to get a policy for $10-20k. The premium is reasonably priced, and this way there is enough money to be burried. The last thing anyone wants is for their spouse or children to have to fork over $10k to burry them. This way you will always have a policy large enough to pay for those expenses.

orangehills · October 2013

All other posts say everything, but I say term is the way to go. $500,000 for my husband, 30 year term, costs us $600 a year. And the younger you get it set up, usually the cheaper it will be! I got a 200,000 term for 20 years for myself and it's only $12 a month. Just get enough to cover childcare/mortgage should something happen.

MommyLiberty5013 · October 2013

My DH comes from a farming family - his dad and brother still work it.

I think your DH is very under insured given the danger farmers face using heavy machinery and equipment, climbing, repairing, etc..

I have heard of numerous stories involving farmers and accidents.

Also, please consider an accidental disability policy for him. It is also likely that he could lose a limb or be prevented from working in some way.

takmjs · November 2013

Thank you so much for your replies! I never thought about being able to cover the cost of the farm, because yes, he does want to take over it someday. I only thought about the incomes we currently make. I will definitely be dropping our current whole-life policy and finding a much larger ($500,000+) term policy for each of us.

We EACH pay $1,000 for our policies, @hoffse.

hoffse · November 2013

Agh - I mis-read that. In that case, drop those policies ASAP! It's even worse than I thought...

vlagrl29 · November 2013

takmjs said:

Thank you so much for your replies! I never thought about being able to cover the cost of the farm, because yes, he does want to take over it someday. I only thought about the incomes we currently make. I will definitely be dropping our current whole-life policy and finding a much larger ($500,000+) term policy for each of us.

We EACH pay $1,000 for our policies, @hoffse.

holy crap! you are getting screwed!

Life insurance

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