Life Insurance

[JinCO]

I am meeting with our insurance agent tomorrow to discuss life insurance options. Are there general rules of thumb in terms of how much coverage to get? Our only coverage currently is through work at 2x income.

[JanH]

I can't remember exactly the ratios, but I do know that it is higher if you are the main breadwinner. Something like 5 times your annual income. But, I may be all wrong on that number. We need to reexamine ours to see if we have caught up to the ratio over the years. That's why I can't remember. We were ahead of the ratio for awhile.

[maat55]

8 to 10 times is the norm, you should get 6 to 8.

[disneysteve]

The rule of thumb is 10 times income, but you should just take that as your starting point and calculate your true need up or down from there. What expenses will your surviving spous and children have if you were to die tomorrow? What would you want to provide for? Do you want your spouse to be able to pay off the mortgage with the insurance proceeds? What about college for the kids? Do you have any other debts that would need to be paid (student loans, auto loans, credit cards, etc.)? Does your spouse work and earn enough to maintain the current lifestyle, or would she need proceeds from the insurance to help make ends meet? What does your current savings portfolio look like?

When I first got insurance, it was for more than 10 times income. Twice over the years, I've reduced my coverage as our debts got repaid and our personal savings grew since there would be less need for the insurance money if I were to die today compared to if I had died 10 years ago.

[JinCO]

Thanks for the advice and questions to consider. My wife and I make about the same amount of income. I assume that the numbers you guys are suggesting (6x - 10x income) should be applied to each of us?

Steve - I see what you are saying about the importance of insurance decreasing over time as you become mored financially secure. At some point will it make sense to cancel your coverage or will you just continue to scale back the death benefit? I am considering a 20-year term which will take us to the age of 52. I am hopeful that we would not need insurance benefits at that point.

[disneysteve]

Originally Posted by JinCO

I assume that the numbers you guys are suggesting (6x - 10x income) should be applied to each of us?

Yes.

Steve - I see what you are saying about the importance of insurance decreasing over time as you become mored financially secure. At some point will it make sense to cancel your coverage or will you just continue to scale back the death benefit? I am considering a 20-year term which will take us to the age of 52. I am hopeful that we would not need insurance benefits at that point.

It all depends on your situation. Personally, at 52, we'll still have a mortgage unless I hit in big in Atlantic City one of these days. And my daughter will start college the year I turn 51. So I'll likely still be needing life insurance at that point.

[JinCO]

So here are the quotes I received:
20 year @ $500K - $42 for me, $37 for wife
30 year @ $500K - $60 for me, $46 for wife
20 year @ $1M - $69 for me, $60 for wife
30 year @ $1M - $97 for me, $75 for wife

$500K would be about 4x income plus the 2x from work = 6x
$1m would be about 8x income plus the 2x from work = 10x

The $500K option plus work coverage would be enough to pay all liabilities (mortgage, student loan debt) and would enable someone to maintain their current lifestyle. It would likely leave someone a bit short in covering 100% of tuition costs (but that is about 17 years away)

I am leaning toward the $500K 20 year term coverage. Would 30 year coverage be better? I could always cancel if it looked like we wouldn't need the extra 10 years.

[disneysteve]

Originally Posted by JinCO

The $500K option plus work coverage would be enough to pay all liabilities (mortgage, student loan debt) and would enable someone to maintain their current lifestyle. It would likely leave someone a bit short in covering 100% of tuition costs (but that is about 17 years away)

I am leaning toward the $500K 20 year term coverage. Would 30 year coverage be better? I could always cancel if it looked like we wouldn't need the extra 10 years.

I wouldn't worry about the college issue. The kid can always take some loans or work part-time to help cover costs. Also, if one parent were to be deceased, that would probably impact financial aid eligibility.

Should you go with 20 or 30 years? That's a tough call since none of us has a crystal ball to know what our futures hold. One thing to keep in mind is that term life rates have been steadily declining for years now. Someone who bought a policy 5 years ago could buy a new policy today for less money even though they are 5 years older. So if that trend continues, 5 or 10 years from now, it is possible that you could get a new policy at a lower rate.

[tripods68]

Wrong post

[Joan.of.the.Arch]

Remember that if you die and have minor children, they will also be eligible for survivor's social security.

[JinCO]

Thanks Joan - I didn't realize that about the SS. Good to know.