This is my standard reply to life insurance queries. And, I think many insurance agents will disagree with these comments.
First of all, decide WHY you want insurance. Think of insurance as income-protection, i.e., if the insured passes away, the beneficiary receives the proceeds to offset that lost income. With that comment behind us, I would never buy insurance on kids, after all, they don’t have income and they don’t work. An agent might say to buy it on your kids while it’s cheap and they’re healthy – but run the numbers, the agent is usually wrong, remember, agents are really salesmen/women and its in their interest to sell you insurance. Also – I am strongly against insurance on kids on two counts. One, you are placing a bet that you kid will die and you are actually paying that bet in premiums. I can’t bet my child will die. Two, it sounds plausible, i.e., your kid will have a nest egg when they grow up but factor inflation in – it doesn’t look so good. A policy of face amount of $10,000, at 4.5% inflation and 30 years later is like having $2,670 in today’s dollars – it’s NOT a lot of money. So don’t plan on it being worth much in the future to your child as an investment. In summary, skip insurance on your kids.
I also have some doubts about insurance as investments – it might be a good idea but it certainly muddies the water. Why not just buy your insurance as one step and your investment as another step? – its a lot simpler to keep them separate.
So by now you have decided you want insurance, i.e., to protect your family against you passing away prematurely, i.e., the loss of income you represent (your salary, commissions, etc.).
How Long Should You Get Life Insurance?
Contents
Next decide how LONG you want insurance for. If you’re around 60 years old, I doubt you want to get any at all. Your income stream is largely over and hopefully you have accumulated the assets you need anyway by now.
If you are married and both work, its not clear you need insurance at all if you pass on. The spouse just keeps working UNLESS you need both incomes to support your lifestyle (more common these days). Then you should have one policy on each of you.
If you are single, its not clear you need life insurance at all. You are not supporting anyone so no one cares if you pass on, at least financially.
If you are married and the spouse is not working, then the breadwinner needs insurance UNLESS you are independently wealthy. Some might argue you should have insurance on your spouse, i.e., as homemaker, child care provider and so forth. In my opinion, I would get a SMALL policy on the spouse, sufficient to cover the costs of burying them and also sufficient to provide for child care for a few years or so. Each case is different but I would look for a small TERM policy on the order of $50,000 or less. Get the cheapest you can find, from anywhere. It should be quite cheap. Skip any fancy policies – just go for term and plan on keeping it until your child is own his/her own. Then reduce the insurance coverage on your spouse so it is sufficient to bury your spouse.
If you are independently wealthy, you don’t need insurance because you already have the money you need. You might want tax shelters and the like but that is a very different topic.
Suppose you have a 1 year old child, the wife stays home and the husband works. In that case, you might want 2 types of insurance: Whole life for the long haul, i.e., age 65, 70, etc., and Term until your child is off on his/her own. Once the child has left the stable, your need for insurance goes down since your responsibilities have diminished, i.e., fewer dependents, education finished, wedding expenses done, etc
Is Mortgage Insurance Worth it?
Mortgage insurance is popular but is it worthwhile? Generally not because it is far too expensive. Perhaps you want some sort of Term during the duration of the mortgage – but remember that the mortgage balance DECLINES over time. But don’t buy mortgage insurance itself – much too expensive. Include it in the overall analysis of what insurance needs you might have.
Is Flight Insurance Worth it?
What about flight insurance? Ignore it. You are quite safe in airplanes and flight insurance is incredibly expensive to buy.
Insurance through work? Many larger firms offer life insurance as part of an overall benefits package. They will typically provide a certain amount of insurance for free and insurance beyond that minimum amount is offered for a fee. Although priced competitively, it may not be wise to get more than the ‘free’ amount offered – why? Suppose you develop a nasty health condition and then lose your job (and your benefit-provided insurance)? Trying to get reinsured elsewhere (with a health condition) may be very expensive. It is often wiser to have your own insurance in place through your own efforts – this insurance will stay with you and not the job.
How Much Life Insurance Do I Need?
Now, how much insurance? One rule of thumb is 5x your annual income. What agents will ask you is ‘Will your spouse go back to work if you pass away?’ Many of us will think nobly and say NO. But its actually likely that your spouse will go back to work and good thing – otherwise your insurance needs would be much larger. After all, if the spouse stays home, your insurance must be large enough to be invested wisely to throw off enough return to live on. Assume you make $50,000 and the spouse doesn’t work. You pass on. The Spouse needs to replace a portion of your income (not all of it since you won’t be around to feed, wear clothes, drive an insured car, etc.). Lets assume the Spouse needs $40,000 to live on. Now that is BEFORE taxes. Lets say its $30,000 net to live on. $30,000 is the annual interest generated on a $600,000 tax-free investment at 5% per year (e.g., munibonds). So this means you need $600,000 of face value insurance to protect your $50,000 current income. These numbers will vary, depending on interest rates at the time you do your analysis and how much money you spouse will need, factoring in inflation. But the point is that you need at least another $600,000 of insurance to fund if the surviving spouse doesn’t and won’t work. Again, the amount will vary but the concept is the same.
This is only one example of how to do it and income taxes, estate taxes and inflation can complicate it. But hopefully you get the idea.
Sources for additional information:
- Consumers Reports printed an in-depth, three-part series in their Jul/Aug/Sep 1993 issues.
- Many sites on the web offer life insurance quotes. Here are a few that have been rated highly by consumer advocates. Also see the article in the New York Times of 1 August 2001.
Insweb.com, NetQuote.com, Insure.com, Term4sale.com.
Article Credits:
Contributed-By: Joe Collins
[ A note from the FAQ compiler: I believe that this article offers sound advice about life insurance for the average middle-class person. Individuals with a high net worth may be able to use life insurance to shelter their assets from estate taxes, but those sorts of strategies are not useful for people with an estate that falls under the tax-free amount of about a million dollars. Your mileage may vary. ]