Term Life Insurance-What Do I Really Need?

Xstatic3333 · August 2014

Now that we have a house, I'd like to get us both onto some term life insurance. Our incomes are evenly split in such a way that, even though our payment is very comfortable, one of us probably couldn't realistically afford it on our own for more than a couple of months without doing some serious ramen-eating (::hangs head in shame::). I've heard the recommendation that we should get ten times our income, which would be around $450,000 for each of us. However, $250,000 would be quite a bit cheaper and allow either of us to pay off the house and all other debt with a little left over. We have no kids currently, and I've heard we can increase the coverage amount once we do. For now, I'd like to keep it as cheap as is practical to free money for our other goals. What do you/would you do? Also, for length, should we go 20 or 30 years? We're 29 and 35, and both in good health although H may just barely be in the overweight category. It seems possible my diving hobby/job will count against me a little bit for rates.

Also, although I view this as a practical business matter that we just need to do, H views it as a horribly distressing conversation about death that he'd like to procrastinate indefinitely. Does anybody have any brilliant ideas about making this more palatable to him? With the medical exam required I kind of need his cooperation here.

Thanks in advance; I always find the advice and different perspectives here so helpful when I'm planning these things out.

CuriousKiddosMama · August 2014

I would go with 20 years- especially if you are planning on adding to it in the future. One reason that 20 years is recommended is that by that time your mortgage (depending) may be paid off, and any kids will be grown and on their own. We just got 20 year when DS was born, knowing that it will expire before any other future kids are grown and gone.
For myself we got 10x my income when I was working- we figured that DH would need that for childcare if something happens. For DH we got a little more because he is the sole income and we wanted to allow a bit for his income to increase.

Let me ask this- would 2 $250k policies be cheaper than the $450k policy? That may be something to look into. Also, make sure you do shop around when you decide to buy- premiums can vary a lot (we did Xander insurance like Dave recommends and were happy with it). Otherwise I would possibly buy a 250 now with the idea of adding 250 in X amounts of years. X years may be when you have kid #1 or #2 and you feel like you need more. Otherwise before then, it's really just enough for burial, paying off the house so that the other can afford to live and go through the stages of grief- this may mean some time off from work too. Even if the house is a bit much now, if either of you were left with a paid for or almost paid for house, I'm sure you would be fine.

As far as DH is concerned- he just needs to man up. When you do have kids, will you get a Will and appoint Guardians for your kids, or is that too 'depressing?' Maybe just remind him that its something you need to have done as a responsible adult. The exam for me consisted of weight and a blood draw along with a bunch of questions being asked. It was nothing major!

Xstatic3333 · August 2014

Thanks! That was super helpful. To clarify, we would be getting two $250,000 policies. We will have our mortgage paid off in 20 years barring the unforeseen, so that's a very good point about the length of the term. Our hopeful future kids would be teenagers, but one of us with a teenager and no mortgage would be fine even if we never get a raise.

DH will man up-it's less something I tiptoe around than something I want to make him feel more comfortable about. He gets a sad look on his face whenever I bring it up. I see how my initial wording was misleading there. We will absolutely do a will when we have kids.

I did check out Zander and their rates seem good. (All the talk about DR around here got me to check out one of his podcasts out of curiosity last week. It definitely improved my opinion of his system, and was entertaining too). Our other option would be to wait until the January open enrollment at DH's job, but I'm not sure if I want to wait that long for slight savings.

CuriousKiddosMama · August 2014

I wouldn't wait. Not because it's too long or anything, but you probably wouldn't get as much coverage as you would want anyways through the work plan.
I understand him getting sad about it. We are doing our wills now and that is depressing! I don't want to think about who I would give my kid(s) to or what to do in case of a terminal illness, so I completely understand his feelings there. I thought it was something he didn't want to talk about at all. It was probably my misreading!

Xstatic3333 · August 2014

vikingsfan711 said:
I wouldn't wait. Not because it's too long or anything, but you probably wouldn't get as much coverage as you would want anyways through the work plan.
I understand him getting sad about it. We are doing our wills now and that is depressing! I don't want to think about who I would give my kid(s) to or what to do in case of a terminal illness, so I completely understand his feelings there. I thought it was something he didn't want to talk about at all. It was probably my misreading!

No not at all, definitely my phrasing!

We've been super busy since moving, but I'll try again the next time we're just hanging out and keep it all business. I can only imagine this stuff is 1000x tougher once kids are involved.

Wulfgar · August 2014

It all depends on the people. MW and I had no issue discussing this and we did our wills and other legal paperwork earlier this year. Our biggest issue currently is making sure that we have enough health insurance. Since you don't have children, the 250k should be enough for now.

vlagrl29 · August 2014

We got $250k term on each of us. I fully believe both spouses need to have it. I can't remember if we have 20 or 30 at the moment, but when we have 2 kids I want to up DH's policy to 500k and keep mine the same.

DH and I have no issue discussing this kind of stuff, after DD was born we had a will done on us. Heck before we got married I wanted pre nups done. DH knows I like to keep everything protected.

You could tell your H the story of my first H passing away when we were married. If it wasn't for the life insurance I wouldn't have been able to pay those bills that were due. Life is too short, so you need to be prepared even if it's not a pleasant thought.

vlagrl29 · August 2014

My policy is $72 every 6 months and Dh's is $82 every 6 months. I think we went thru Genworth. What I'm really excited about is eventually we will get a small policy on DD and they told me I could add her to mine as a rider and it will be super cheap that way.

Xstatic3333 · August 2014

vlagrl29 said:
My policy is $72 every 6 months and Dh's is $82 every 6 months. I think we went thru Genworth. What I'm really excited about is eventually we will get a small policy on DD and they told me I could add her to mine as a rider and it will be super cheap that way.

Oh wow, that's better than my quote by far (are we around the same age?). I'll have to check out your company.

vlagrl29 · August 2014

Xstatic3333 said:

My policy is $72 every 6 months and Dh's is $82 every 6 months. I think we went thru Genworth. What I'm really excited about is eventually we will get a small policy on DD and they told me I could add her to mine as a rider and it will be super cheap that way.
Oh wow, that's better than my quote by far (are we around the same age?). I'll have to check out your company.

We bought them when I was 30 and DH was 34. I'm now 34 and DH is 38. We use an insurance agent who gets the quotes for us. He understands we are on a budget and always comes back with great prices.

brij2006 · August 2014

You may think the amounts I list below are crazy, but bare with me.

Here's how we recommend you come up with the amount of term insurance to get.

Add up all of your debts + any future kids' college tuition + 7 times your salary = How much life insurance to get.

It may seem like an insane amount, but in the event of your death the last thing you would want is for your H to have to worry about how he's going to mourn the loss and pay the bills. This is exactly how we determined the amount of term insurance for us to get, and we each purchased $500k policies with a 20 year term.

The intentions are that within those 20 years you will have paid off debt, paid off or down the mortgage, and have most of the kids' college funds saved up, along with a good amount of investments set aside for retirement. So after the 20 year term, life insurance should no longer be a need and you will be self insured.

If my H were to pass away today, our thought process was that I would pay off the cars, house, and student loans. That would leave me with about $400k left. Since we have a baby on the way, I would take $50k of that to put into a fund for its college tuition then I wouldn't have to worry about saving it up on just my salary for the next 18 years. The extra $350k would give me enough money to take 6 months off of work if I choose to so I can mourn the loss of my husband. Then I would also have enough money to not necessarily live a lavish lifestyle, but have the ability to dig into that pot and pull anything out if I feel that me and the child should go on a Disney vacation or I need a newer car and pay cash for it. It isn't to "get rich" but it's so our lives can keep going and there won't be a worry about money. When we first got married we bought a policy for $100k, because we figured that was enough to pay off debt and that was it. Then I told H there was no way I could continue to live in the home that we've built together. I would have to sell and move. I also knew that there was no way I could go back to work immediately, but would have to in order to make ends meet on the utilities and upkeep of the home.

My H was not on board with discussing this at all. He thought it was stupid to have life insurance when we didn't have any kids. Then we had a chat with my uncle who lost his wife at age 29, just 5 years after they were married. He said that he traveled a bit and did some soul searching for 6 months after she passed, and was able to pay off everything they had loans on and take a leave at his job for a year. There was no way that he would have been able to do that if they didn't have an insane amount of life insurance, and he wouldn't have been ready emotionally to continue his life. That really hit my H because it forced him to put himself into my uncles shoes and realize how important this was for us. We bought our $500k policies 3 weeks later. ;-)

hoffse · August 2014

I agree with Brij. H and I have no children, but we have a lot more student loan debt than many on these boards. Some would be forgiven at death, some would not. We both have $300K policies and $200K policies through our jobs (or rather, I have a $200K policy through my job and H will have one starting next month). So we are about to be insured up to $500K each. That's enough to pay off all of our debt, our mortgage, pay for burial expenses, take a leave of absence from work, and then have a nest egg for the future. It wouldn't be a HUGE nest egg, but it would be enough for us to be able to invest it and know that we would be fine in the future.

We will re-assess when we have kids and will almost certainly increase it to account for their care/education.

As kids get older and debt is paid off then you need less and less. But policies are the cheapest when bought young, so it makes sense to err on the side of over-insuring when you are young to lock in the low rates. Then drop coverage as you age and your financial circumstances change.

dalm0m · August 2014

Term life is a rip off. Buying it means you are betting you are going to die & the insurance company is betting you will live so they can collect your premiums & never give anything back. At least there is residual value in whole life.

That said you need enough to replace each person's income, pay the funeral expenses, pay off the mortgage in full & pay 4 years of college tuition for any kids. That's not only a function of your income.

Xstatic3333 · August 2014

dalm0m said:

Term life is a rip off. Buying it means you are betting you are going to die & the insurance company is betting you will live so they can collect your premiums & never give anything back. At least there is residual value in whole life.

That said you need enough to replace each person's income, pay the funeral expenses, pay off the mortgage in full & pay 4 years of college tuition for any kids. That's not only a function of your income.

If whole life works for you then great, but I wouldn't agree that term life is a rip-off. It's actually not that expensive relative to the protection that you get. I don't think the returns on whole life are good enough to justify the cost-I'd rather pay less for term and invest the difference.

brij2006 · August 2014

dalm0m said:

Term life is a rip off. Buying it means you are betting you are going to die & the insurance company is betting you will live so they can collect your premiums & never give anything back. At least there is residual value in whole life.

That said you need enough to replace each person's income, pay the funeral expenses, pay off the mortgage in full & pay 4 years of college tuition for any kids. That's not only a function of your income.

I'm sorry, but you either A. must be a life insurance salesman, or B. are brainwashed by your life insurance agent or financial counselor.

Term insurance is not an investment tool. It is purely what it is called.... insurance. That's like complaining that you're paying an annual premium for car insurance on the bet that you're going to need it if you get in an accident. Yet the company is just collecting the premium each year and laughing their way to the bank while you get nothing back if you don't have an accident. Um, correct, that's called insurance. However, if you do need it and use it, then the insurance company is almost always out more than what you paid in your premiums over that 15 year term. How "useless" was it then?

If you want to get money back from life insurance then instead of buying a whole life policy for $500k at $2k/ year, buy a 25yr term for $600/year and invest the $1,400 difference in a Mutual Fund. Not counting any interest accrued, in 10 years you will have $14,000 in said mutual fund on top of the $500k in life insurance. After the 25 year term is over you will have $35k in it (not including the 6-12% interest they're accruing. Compare that to the cash value schedule 10 and 25 years into a $500k whole life policy and let me know which one you end up ahead in.

Here's a good article from Forbes that explains a little on why whole life is not an investment tool. http://www.forbes.com/sites/timmaurer/2013/05/03/term-vs-perm-life-insurance-in-90-seconds/

FWIW I'm a licensed life insurance agent and work a lot with this. Our agency does not believe in whole, universal, or custom whole life policies for this very reason, and we make a buttload of commissions off a whole life policy vs a term policy. So it would actually be in our best interest personally to sell a client a whole life policy, but it's just not a smart investment. If we wouldn't buy a whole life policy ourselves because it's crap, then why would we sell it to people who trust us with their money?

hoffse · August 2014

+1 to everything Brij said. Whole life can be used as an estate planning tool for ultra high-net-worth individuals who need to get assets out of their estates for tax reasons upon death... but for most of us, whole life is useless because we will (hopefully) not die with so much money leftover that we have to start planning to transfer assets out at a relatively young age. If you are using whole life as an investment during your lifetime, it tends to be a really bad deal/return.

Besides, if you financially plan correctly you can CANCEL term life insurance once you get to a certain age. You really shouldn't need it once your kids are earning their own living and you are approaching retirement. My parents cancelled both of their policies when I passed the bar. At this point I'm on my own, and if one of them dies the other has plenty to live on without insurance. Hopefully they have 20-30 years left. So that's 20-30 years where they are NOT paying life insurance premiums and can invest that money instead.

**Obviously this is not legal advice.

brij2006 · August 2014

hoffse said:

+1 to everything Brij said. Whole life can be used as an estate planning tool for ultra high-net-worth individuals who need to get assets out of their estates for tax reasons upon death... but for most of us, whole life is useless because we will (hopefully) not die with so much money leftover that we have to start planning to transfer assets out at a relatively young age. If you are using whole life as an investment during your lifetime, it tends to be a really bad deal/return.

Besides, if you financially plan correctly you can CANCEL term life insurance once you get to a certain age. You really shouldn't need it once your kids are earning their own living and you are approaching retirement. My parents cancelled both of their policies when I passed the bar. At this point I'm on my own, and if one of them dies the other has plenty to live on without insurance. Hopefully they have 20-30 years left. So that's 20-30 years where they are NOT paying life insurance premiums and can invest that money instead.

**Obviously this is not legal advice.

***Stuck in Box****

brij2006 · August 2014

Agh! My computer doesn't like to cooperate sometimes. Here's what was supposed to be posted above....

We handle a lot of large farmers who have multi million dollar estates. There are only a few situations where we recommend whole life policies, but these are very rare setups. Most of them are what you described above.

vlagrl29 · August 2014

Term life really is the way to go and it's super affordable and gives you a peace of mind.

hoffse · August 2014

brij2006 said:

Agh! My computer doesn't like to cooperate sometimes. Here's what was supposed to be posted above....

We handle a lot of large farmers who have multi million dollar estates. There are only a few situations where we recommend whole life policies, but these are very rare setups. Most of them are what you described above.

Yep. I've worked with a few estates that have them. It's just one of several tools that estate planners use. For most folks, it's super serious overkill. I've never understood why regular people buy them.

CuriousKiddosMama · August 2014

@dalm0m‌ an example of how whole life sucks. Dh just canceled his policy last year that his parents had gotten him at birth and had been paying into for 37 years. After 37 years- that 'investment' netted us like $2k.(we got 2k on cancelation). He had 10k in coverage and it was costing 500 a year. You tell me how he did on that investment. I told him he was an idiot for letting them keep it that long!

takmjs · August 2014

My DH and I, both 32 yr old, are canceling our whole life policies and getting term life policies this summer. We didn't do any specific type of calculation for figuring out the amount, but he's a farmer who plans to take over the family farm someday (within 10 years, probably), so he also got an accident/dismemberment policy. Anyway, we got beyond what we thought we would need for paying for kids, college, making payments on the farm, replacement income and retirement, etc., so we each are getting $500k policies. His is done and costs $600/year. My health records are taking forever to get processed, but I was initially quoted $480ish/year, so I'm hoping it's close to that.

We chose 30 year policies, b/c we have a 2 year old and I'm pregnant now, may have 1 more child in a few years. We figured since kids can be under your care (health insurance, living at home?) until they're in their upper 20s, we would do a 30-year policy to be safe. Better to be too long, I think, than need to add to it or get another policy when it's more expensive.

Our whole life policies for $100k for about $950/year--for each of us--just seemed too high for what we would get in return. We can do much better with investments--mutual funds, 403b's, IRA's, etc.

maple2 · August 2014

I don't know whether all policies are like this, but ours allows us to lower the coverage amount or even end the policy early with no penalty. Based on that and the fact that we have kids, we decided to go with a longer term of coverage. We anticipate lowering the amount for sure and possibly cancelling it all together before the terms is up.

We also decided not to include the cost of college for the kids when deciding on an amount because 1) we are already saving for that separately, 2) we don't plan to pay for all of college no matter what, 3) we are fortunate to have family members would would be willing to help with that expense if DH and I died, and 4) it increased our coverage amount and corresponding premium by a lot.

Term Life Insurance-What Do I Really Need?

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