life insurance payouts -- estimated needs too high?

[deca]

I just reviewed my life insurance policy with an agent (USAA) who felt that my benefit amount was "barely adequate". I have $300K of coverage. DH has the same amount. We have one child who is 3 years old. We have a mortgage payoff amount of about $118K. We also have some student loans, but my understanding is that these can be discharged upon the borrower's death. Also that at least in my state, a surviving spouse's joint ownership of assets (house, liquid cash, etc.) supercedes any creditors. So I think the student loans are a moot point. The only other debt we have is $3500 still outstanding on DH's car.

It seems like the calculations people make about life insurance payouts are based on certain assumptions that I'm not sure I share:

* pay off mortgage in full
* pay off perhaps substantial consumer debt in full
* surviving spouse will not return to work for years, if ever
* enough funds to pay for college in full ANYwhere

It also seems people completely ignore Social Security. Unless I misunderstand the annual statements I get, if I were to die, my spouse would receive monthly payments of over $2000 until our child turns 18. And vice versa, our current estimated benefits are pretty similar amounts.

And, it seems people ignore the fact that expenses would probably go down substantially with one less adult in the house. DH's "bills" are substantial -- car payment, student loan payment, life insurance, medical expenses. If he weren't around, our overall monthly budget would be a lot lower.

For me personally, if DH were to die and I received $300K in life insurance benefits, I would not pay off the mortgage. I would continue to make the payments we currently make (5.125% interest rate). I'm sure I would take some time off work, but I'm also sure that at some point life would have to return to some kind of "normal," and I would be employed in some fashion. DS and I could EASILY get by on less than $30K/year, especially with the SS payments. So let's say after paying funeral expenses and taking time off work, I would still have a minimum of $200K to put into a long-term account to pay for DS' post-secondary education. I really think that's enough.

The guy on the phone said "I don't make commission, but in your shoes I wouldn't have less than a million in coverage."

Is there anything I'm not considering here?

[Aleta]

Yes, there is. You will still need to contribute to a retirement account when you work and you won't be saving as much as there is one less person to contribute to the same pile of retirement money. If I were to go on your assumptions, I would not be able to save for many things and yes, there is one less person to fund in the house. When my step-father died some years ago, my Mom found out that she was the one who spent the most not my step-father. One never knows.

[Ima saver]

I took our some insurance on my husband when we built our house. It was 10 year term. When the term was up, the insurance became too expensive for us to afford.
I have enough in savings, mutual funds, etc. to live on, so I no longer carry any insurance on him. I have never had insurance on my life but then no one is depending on my income.
I personally think that $300,000 is enough.

[Aleta]

Ima: Alot depends on the age of the parent, how many kids, their ages, is the other spouse a stay-at-home Mom with work skills not used for some time, and time, mortgage and debt balances.

If I were a young person today, I would definitely buy term insurance. The younger you are when you buy it, the cheaper it is. I would also buy a set time, ( 10-15-20 year term).

We have life insurance (term) on my husband that will last until a few years after retirement. I feel the amount we pay annually offsets the need that would be there for me.

[MonkeyMama]

I don't know much about your situation, but overall yes, I agree, there are a lot of assumptions made when it comes to life insurance I don't jive with.

For one, why on earth would I pay the mortgage if something happened to my spouse? I can pay the mortgage just fine without his income, and the last thing I Would want to do is tie up another $200k in assets if I lost his earning potential? In fact, the reason we have this house is because my dh really wanted a big house. IF something happened to him I Would no doubt downgrade anyway. when I told my life insurance agent this he says - no one downgrades when a spouse dies. YEah whatever, there is a lot of things no one else does that we do - I could downgrade to a house down the street and pay off the mortgage if I wanted to. That I Would consider.

Anyway, we felt pushed into far more insurance than we ended up taking, and I didn't really see the point. In fact, I Still have far more than we will ever need, if you ask me, but we locked in the rates while we were in our 20s and have really low rates, so it is not much for the peace of mind. Weighing the benefits and the rates I am happy with what we ended up.

I have to admit though while I wasn't buying why we needed more insurance on the usual factors, I have since become relieved that we both have larger policies. One thing I did not think much about before was that we designated dh's sister as the guardian - and living in the Bay Area they paid about $700k+ for a 2-bedroom home very recently. Frankly not really sure how they could afford it. & though they make good wages, obviously they have some serious expenses between the mortgage and their own 2 kids. Anyway, I didn't think about it at the time, but frankly, though dh and I don't need as much life insurance from each other, the kids could need significant money, simply if their guardians would like to trade up to a bigger house, etc. So I feel in the end we picked a good amount, in case something happened to BOTH of us, though I was fighting it at the time. This is something I didn't think about before which I think is huge now. I want the kids to be well taken care of. Just another angle I never saw mentioned before.

[disneysteve]

deca - You certainly may be right for your own situation. Everyone's circumstances are different, and they change over time. I've reduced the amount of insurance I carry on myself twice over the years. As we paid off debt and built our personal savings, the amount of coverage I needed lessened. In fact, it was my agent who recommended I reduce my coverage last time around. If the numbers your agent gives you don't jive with your actual needs, adjust them. In fact, ask him to adjust them. When my agent did a projection, I pointed out a couple of flawed assumptions and he ran the numbers again taking those things into account, which reduced the amount of coverage he advised me to take.

Also, for everyone, keep in mind that term rates are at historic lows. If you took out a term policy more than about 5 years ago, you are probably paying too much. As long as your health hasn't changed, you may be able to get a new policy and save some money even though you are older. For example, a 40 year old today can get coverage for less than a 30 year old could 10 years ago.

[LivingAlmostLarge]

Depends maybe the working spouse needs money to grieve. Maybe to pay for extra childcare, maybe to pay for housekeeping, etc. Who knows?

But as you self-insure you probably need less. But when children are small and you have debts, it could be wiser to carry more than less.

But I don't have any so who am I to talk?

[poundwise]

As has been said, everyone's situation is different. Usually, that is a cop-out to avoid debate but, in this case, there are several variables that make it true.

That being the case, I think the one-size-fits-all approach of x-times annual income for a projected benefit need is obviously flawed. In general, I think it definitely overestimates. In some cases, however, it may not yield enough for your family's needs.

One thing, it doesn't hurt to remember that the x-times approach was developed and marketed (heavily) by (guess who) the insurance companies.

Rely on yourself, not some shot-in-the-dark formula. Sit down and determine, based on your family's factors, what kind of benefit would be needed. You won't be able to nail down a perfect, for certain, number either but at least your plan will be based on real-life.