Increasing Life Insurance – Figuring How Much
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Last week we met with our insurance guy to see about getting quotes on life insurance policies.
We already have term life insurance to cover the mortgage and a bit extra should either one of us die.
Now that we're parents we're looking at increasing our coverage to cover some additional expenses.
We can't increase our policies; we have to get new ones to make up the difference. We're looking at our current insurance company as well as competitors to see if we're getting a fair rate.
Looking at What We'd Like Covered By the Insurance
The rule of thumb for life insurance is to get a policy that is 8-10x your annual income.
While I appreciate having some guidelines, I think we have to consider our own family's particular needs.
Immediate Obligations
First off, we want to make sure our final expenses are covered. We're going to use the estimates of $15,000 for funeral expenses.
When my grandmother passed away she had enough set aside to take care of her funeral costs, which was extremely helpful for the rest of the family (too bad the insurance company dragged their feet).
Long-Term Plans
Both us would like to have the remaining debts paid off. We'd also like to leave some money for our daughter (and a bit for her legal guardians should both of us pass away).
We don't need to leave a massive amount of money – we're not looking to create a big income stream.
Buying too much life insurance is expensive and isn't our goal – becoming self-insured at some point is a goal though. How much money would you or your spouse need to live with no worries but the grief of losing the loved one?
I hate to make it seem that you can estimate your spouse's grieving period – you simply can't know. I'm just mentioning that you should factor in a grieving period. Between planning the funeral and getting everything financially squared away, it take quite a bit of time.
If all the debts are paid off, that will lower monthly expenses considerably and it will be less of a burden on the surviving spouse and our baby girl.
Thoughts on Life Insurance
To be honest, looking at life insurance is kind of depressing. I know it's necessary, but I will be so happy when we get the policies done.
HavenLife can be a helpful resource for finding you a deal with term life insurance.
This topic is definitely something I'd like to get some other perspectives on.
How did you calculate how much life insurance coverage your family needed?
We don’t have too much life insurance right now (just the free 40,000 from my work and similar from his work).
I’m glad you got something now.We all have to see what is best for our circumstances.
Right now, I’ve just got like 3x my annual salary, which is enough to pay my current debt, take care of funeral expenses and leave a little bit of money left to whomever (I think my parents). Its good for now, but i’m getting married soon and will probably need something more robust then.
Congrats on getting married soon! As changes come it helps to check to see you’re properly covered with insurance.
Often people do the analysis to cover the entire need but forget to then back out the amount they have saved. Unless you have estate tax concerns or specific bequests, life insurance is usually only the difference between savings and need.
Great post, thanks!
Thanks Joe for mentioning that point!
I’d also recommend getting a large policy on a single wage earning if one person in the couple doesn’t work. It can be a long and difficult task in getting into the work force and you want to make sure that your spouse has a reasonable amount of time to figure out an employment situation.
I appreciate you sharing that advice Shaun. I think one income families do have to consider that situation and how they want to handle it.
We have 10X. Assuming that you are both young and healthy, the difference in cost for a larger policy probably will not be that huge. One thing to keep in mind is that you cannot count on being sble to qualify for cheap insurance down the road if you later need to increase it. There are tons of medical conditions that do not threaten life but that increase rates significantly. As you age cholesterol often goes up, you may need a depression medication, you could develop diabetes, etc. this is not to say you need to buy massive amounts of insurance, but i think it is a good idea to think about how much you will need taking into account any future children you plan to have and whether you expect significant salary growth, just in case you cannot qualify for more later. If nothing else, you will be older later, which will impact the rates.
You’re absolutely right about life insurance being depressing! But as adults, it’s something we have to get. My wife and I went with a 12X death benefit. We had a lot of reasons: Our income fluctuates, the cost difference between a 10X and a 12X wasn’t that much, we really wanted to make sure the other was well taken care of, etc. This was in addition to the small policies we have through our employers. One other thing to point out is that dependents can also expect a benefit from Social Security.