Term Life insurance-how much do I need?

[elessar78]

Hi everyone,

I decided that I need to get term life insurance.

What am I insuring for? My wife and I both work and have only been married 1 year. We plan on having kids and plan on owning a home. In case something happens, I'd like for those potential kids to be provided for and eventually go to college. I'd like for my wife (or vice-versa) to have my income as well. (Or until she remarries, then the remainder of the money diverts to my college's football team... just kidding, honey!).

I'm 31, she's 28. Earning about 45K and 31K respectively. We're both in very good health.

I'm thinking of getting a 1 million dollar/30 year term life policy for each of us. Is that overkill?

thanks in advance!

[wincrasher]

Depends on the price for the policy - being young, your rate should be low. Because it's fixed on a long term , the rate may be locking in inflation.

General rule of thumb is 10X salary of major breadwinner. Remember, the purpose of insurance is not to enrich anyone. It is to provide stability in a time of crisis and help get thru it.

You don't want your family to end up homeless if you get hit by a truck while buying a hotdog. Figure how much, if you had a couple of kids and a mortgage to keep your family on track until your wife can find a new, less accident prone man to replace you.

In the case you are descibing - $2 million - is 22 years salary for you, and 32 years for her. Of course you may strike it rich in a few years and have a much higher income. Then again, if you are making alot and saving alot, you may not need insurance at all. You have to balance these decisions based on the premium amount. In another sense, every dollar you are spending on life insurance is another dollar you are not putting in a college savings fund for your future rugrats.

[elessar78]

Depends on the price for the policy - being young, your rate should be low. Because it's fixed on a long term , the rate may be locking in inflation.

The rate is low.

General rule of thumb is 10X salary of major breadwinner. Remember, the purpose of insurance is not to enrich anyone. It is to provide stability in a time of crisis and help get thru it.

See the amount is where I get stuck on. I've read a bunch of places that it's 6x, 7x, or 10x. Just seems arbitrary and I don't like being arbitrary with money. The 1 million figure I came up with would assure potential kids of financial support until they reached adulthood and a college education. They can take it from there.

1 mill would be around 33K annually (for 30 years) if they just withdrew from the principal or if they withdrew interest only (not principal) would give them 40K annually (assuming 4% return). These are just ballpark figs not adjusted for taxes or inflation.

You don't want your family to end up homeless if you get hit by a truck buying a hotdog. Figure how much, if you had a couple of kids and a mortgage to keep your family on track until your wife can find a new, less accident prone man to replace you.

Maybe it should even be more than 1 million then? Because if one spouse passes, it's not really just the income that's missed. It's also the ability to care for the kids. So maybe I need to factor the cost of the survivor having the option of working part time too?

[wincrasher]

You are missing the point. 1 million is too much. You are paying for 2 million to boot by having 2 policies. The term is too long. You don't need to set people up for life - just get thru the difficulties.

Buy a ten year policy and then re-evaluate when it's up. You will still be young and healthy enough to get a longer term plan then. You may have 5 kids by then and need something more - or none and need less.

Keep in mind that benefits from life insurance are tax free. So getting 30k a year is like income from a 50k/year job.

Invest the difference in premium.

[disneysteve]

The time to buy life insurance is when you need it. If you don't yet have children and you don't yet own a home, you are probably jumping the gun by getting insurance now. Just my opinion there.

As for how much you need, yes, 10X is the general rule of thumb and that's a good starting point. From there, though, you need to adjust up or down based on your situation. I'm 44, married with one child. I started with a larger amount years ago when we had first bought our house, had an infant and had a ton of student loan debt. Over the years, I have twice reduced the amount of coverage on me as our needs changed and our personal savings grew. Eventually, we should reach a point where insurance isn't necessary at all because our daughter will be independent and our investments will be sufficient to support my wife if I were to die. So you have to run the numbers and see what needs you actually want to provide for and how much insurance you need to do that.

[elessar78]

Awesome, thanks everyone. This is the kind of thinking I was looking for!

So basically buy insurance as the need arises?

So I just went through our bills/financial responsibilities and we don't really have anything that would be affected by a lost income. We have some individual debt (student loans, small credit card, etc.) but nothing that the other would be legally responsible for.

So at this stage, maybe life insurance is not necessary.

[MonkeyMama]

I don't think $1 mil is too much (total). $2 mil sounds like a bit much.

BUT, I digress from the pack a bit. I don't think it is terrible (at all) to plan ahead and lock in low rates for being young and healthy. Most people tend to "not get around to it."

When getting insurance so young you do need to allow for inflation, increased wages, etc., in the interim. I would lean towards 30-year term due to age (you can always reduce it or drop the coverage down the road).

We got our insurance policies when we were 28/29. It cost pennies. I hear rates are lower now, but now at 31/32 we would pay far more the same coverage. For that reason I would definitely consider insuring your wife now and locking in a low rate.

Buy a ten year policy and pay through the nose to get more coverage later? Risk getting sick and being uninsurable in 10 years? I don't agree. (I do agree with the others that it depends on the premiums. I am just speaking from my experience).

[disneysteve]

We got our insurance policies when we were 28/29. It cost pennies. I hear rates are lower now, but now at 31/32 we would pay far more the same coverage.

This is most likely not true. Term rates have been steadily falling and are now at the lowest they've been in decades. Someone who bought a policy 5 years ago could get the same coverage today for a lower premium even though they are 5 years older. Rates have fallen that dramatically. And there is no reason to think that will change.

[PennySaved]

I generally agree with DisneySteve. Don't go and buy term insurance until you need it. For now, get enough to cover funeral costs and a few months off for your wife while she copes. Crank up the amount when she has kids.

As you get a higher income, remember that the 10x income rule may not apply. You may instead need 10x what you need to live on in a year. For now it might be the same, but over time those amounts will change.

[tripods68]

Life insurance rates are based on mortality table which essentially says, the younger you are the least likely you are to die or vice versa. Not only that, an improved in health care, person's well being, BMI, job status, health history (smokers vs nonsmokers etc), dictates whether a person have high, mid or low insurability rates.

[all4money]

This is most likely not true. Term rates have been steadily falling and are now at the lowest they've been in decades. Someone who bought a policy 5 years ago could get the same coverage today for a lower premium even though they are 5 years older. Rates have fallen that dramatically. And there is no reason to think that will change.

I never knew that we could cancel our term life policy at any time... I purchased my $500,000 30-year term life policy back when I was 24 years old (10 years ago). Now, that I'm 34 years old, you think I could get a $500,000 20-year policy now for cheaper?? My premium right now is $340 per year -- I don't keep up with the insurance field so I didn't realize that rates were coming down at all.

[all4money]

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[disneysteve]

I never knew that we could cancel our term life policy at any time... I purchased my $500,000 30-year term life policy back when I was 24 years old (10 years ago). Now, that I'm 34 years old, you think I could get a $500,000 20-year policy now for cheaper??

It is possible and certainly worth looking into. It doesn't cost anything to get some quotes. Call your current agent and ask for a fresh quote. There are also some websites where you can get quotes like selectquote.com.

[elessar78]

Good to know, I didn't know you could cancel term life policies either.

I haven't shopped around yet but the quotes my agent gave me seem pretty low. For a 15 year policy the annual premiums are approx $350 and $300 respectively for $500K.

[disneysteve]

I didn't know you could cancel term life policies either.

Absolutely. I've changed policies twice over the years, both times to decrease coverage and take advantage of lower rates. I plan to change again as soon as I get around to it as I know I'm paying more than I need to be at this point and I can probably cut my coverage again, too.