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Do I Really Need Life Insurance?

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Do I need life insurance? make sure your family is protectedOne of my 2013 goals was to get life insurance. I had a pretty hefty life insurance policy with my old employer, but now that I’m self employed, I don’t have any life insurance coverage at all. However, my situation is a bit unique and I’m not sure if I really need life insurance. That’s why I have been procrastinating. I really need to deal with this before I turn 40 though. Jeff Rose from Good Financial Cents and Life Insurance By Jeff is going to help me figure out if I need life insurance and how much.

I have been primarily looking at term life insurance. This is the original and simplest form of life insurance. It provides coverage for a fixed rate of payment over a period of time. For example, I can get a $250,000 policy for 20 years. The payment will be fixed at say – $20/month for 20 years. If I pass away with in this time, then the insurance company will pay Mrs. RB40. Term life insurance is the least expensive way to purchase life insurance.

Here is the summary of our current situation

Family

Both Mr. and Mrs. RB40 are 39. Baby RB40 is 2 years old.

Income

My current self employment income: about $1,500/month

Social Security survivor benefit: $1,961/month for Baby RB40 up until 18 years old AND $1,961/month for Mrs. RB40 until our kid is 16 year old.

Hmmm… It’s always hard to swallow when you’re worth more dead than alive. Mrs. RB40 will have to pay for daycare and probably more household help, but it looks to me like the social security benefit should cover the extra cost.

Debt

Primary home mortgage: owe about $250,000.

Mrs. RB40 can sell off our rentals and use the proceeds to pay off the primary home.

Big expense

College: $250,000?

Mrs. RB40 can use part of my retirement fund to pay for Baby RB40’s college if needed. I have about 500k in my retirement fund now.

Retirement Saving

Mrs. RB40’s current job has a pension attached and she also contributes to her 401(k) plan. She plans to continue working for at least another 15 years. I’m pretty sure she would be fine with retirement saving.

Wild card

Aging parents – I’m pretty sure my brothers can take care of my parents if I’m not around.

policy genius

Commentary from Jeff Rose

First, I want to say thank you for Joe for coming to me with his life insurance questions.  I’m still amazed at the amounts of misinformation on the web regarding life insurance that detours families from getting it.  I’ve personally seen too many examples where not having a cheap term life policy created a financial burden for a family.

Questions

1.       Do I need life insurance?

My initial thought is yes and here’s why.  Having the rentals to pay off the home is huge.  Great way to diversify your investments!

Most likely if something where to happen to you, Mrs. RB40 wouldn’t feel compelled to have to pay off the home immediately; so that’s not a big deal.   While I’m not expert in real estate, I would have to assume that “selling off the rentals” is a bit more involved than making a simple phone call.

To me what life insurance would mean for Mrs. RB40 is a financial safety net to not have to have to make any rash decisions on selling rentals, paying off the home or trying to figure out how she’s going to pay for Baby RB40’s college tuition.

When I decided to purchase my term life insurance policy, my goals were the following:

  • I didn’t want my wife to go back to work.
  • I wanted my wife to have enough cash flow to give her the time she needed to make important decisions regarding my financial planning practice, our websites, our home, our 3 boys and any other financial matters.

<Joe follow up> Our goals are a bit different here. Mrs. RB40 will continue to work so my main concern is to make sure they have good cash flow if they have to pay for daycare. We also only have 1 kid and I think that makes a big difference. A life insurance payout would give them extra time to adjust though.

2.       If so how much life insurance should I get?

That’s the fun question!   And also tough.  Quick math would say add up all your debts and purchase that face amount.  I think your situation is a bit more unique.

Here are a couple of things/questions you should consider:

  1. Does Mrs. RB40 want your child to go daycare if something happened to you or would she rather be a stay at home mom? <Joe> Mrs. RB40 will continue to work and Baby RB40 will go to full time daycare/preschool.
  2. You mentioned your self-employment income is $1,500/mo.  Have you considered how much more you save per month because you have the ability to be a stay at home dad?  How much more would Mrs. RB40 need per month to make up for that shortfall? <Joe> Full time day care will cost about $1,250. The additional income from social security survivor benefit should cover the additional expenses.
  3. Does Mrs. RB40 want to manage the rental properties if something happened to you? <Joe> No, she does not want to deal with rental properties. I think she should sell them off ASAP if I’m not around.
  4. What would happen if something happened to Mrs. RB40?  Does she have any life insurance coverage to replace her salary? <Joe> She has life insurance and we should also get some Social Security survivor benefit. I’m sure we would be fine. If both of us are gone, then I don’t know…

After you answer those questions and then pinpoint some numbers, you can use this free term life insurance calculator determine how much you actually need to purchase.

<Joe follow up> It looks to me like social security survivor benefit will replace my income and pay for childcare. The calculator doesn’t work well for my situation.

3.       Is term life insurance the right choice? What term should I get? 20 years?

For your situation (and for many situations) term life insurance makes a lot of sense.  Getting a term policy is super easy and very affordable.  A healthy 40 year-old male can expect to pay around $18/mo for a $250,000 20 year term policy.  A $500,000 policy would only increase to $30/mo.  A healthy female can expect to pay less with their rates running at $16/mo and $27/mo respectively for the same amounts of coverage.

In your case, I think 20 years makes a lot of sense stretching you out until normal retirement age. I will say that we have many people well into their 60’s seeking life insurance coverage.  While the price jump from your 20’s to your 30’s is not that steep, going from your 50’s t0 60’s is.  I never imagined there would be that many seniors buying life insurance, but I guess when you think about how much longer were living nowadays it makes sense.

I say all this because sometimes I’ll have people at least consider taking out a 30 year term policy for this reason.   It will obviously cost more in the beginning, but you can also decide to cancel it (just stop paying) at anytime you wish.

4.       Should I consider whole life, universal life, and other alternatives?

Personally, I’m not a big fan of other types of life insurance for income protection.   Curious on how much a whole life costs vs. term life, I ran an illustration on myself for $250,000.   The 30 year term policy costs me $252 per year compared to $3,440 for the whole life.  Yowzers!

Now I do realize I’m not comparing apples to apples here, it’s still a good demonstration of how inexpensive term life insurance really is.

Universal life insurance has it pros and cons, but for the most part would not apply to your situation.  This type of insurance could make sense for those unable to make contributions to their Roth IRA.  This is strategy that I’ve been considering, but haven’t pulled the trigger yet.

Closing Thoughts

If you’re still undecided on whether you need life insurance coverage for your family, I hope this article at least gets your wheels spinning on the topic.  Joe’s situation is a bit more unique and requires a bit more planning and thought.  Either way, I hope that demonstrating on how inexpensive it is to have some sort of coverage on your family extinguishes any doubts that you can’t afford it.

<Joe follow up> I’m still a bit undecided, but at least now I know I don’t need a big life insurance policy. Even if I don’t have life insurance, my family should be able to maintain their standard of living until Baby RB40 is a grown up. We also have 18 months of living expense in cash equivalent (cash and I Bonds) so that should help with funeral expenses and absorb the shock of losing a stay at home dad.

Over the next few weeks, I’ll get a quote for a 20 years term life insurance policy and figure out if we’ll pull the trigger. I’m pretty sure a $250,000 policy is plenty in my situation. Man, thinking about life insurance is depressing. That’s probably why most people just put it off until it’s too late.

What do you think? Would you get life insurance in my situation? I would love to get some input from everyone.

 

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{ 35 comments… add one }
  • Tortoise Banker May 31, 2013, 12:38 am

    I am also trying to determine if my wife and I should get term life insurance. Thanks for the insightful post! I’ll definitely RT this one

    • retirebyforty May 31, 2013, 3:19 pm

      Thanks!

  • [email protected] May 31, 2013, 3:26 am

    I’m in a different situation – single, almost 50, and a pooch, and my house is about $60,000 underwater, but refi’d recently to 3.75% :-), so no need to pass that on to relatives probably.
    If I die tomorrow, my only hope is that my pooch gets a good loving home.
    You can do whatever you want with me after I’m dead.
    I’m still watching documentaries on Netflix to understand what will happen to me after I die.
    So, for me, I don’t see a reason to get life insurance.

    For you, once BRB40 came along, that changed everything.
    Regardless of what happens to you, you need to help get him through financially until he is 18. Then you’re free,
    and you’ve done, I think, the best you can be expected to do.

    A year ago I did sign up for a new plan with my employer for a long term care plan
    I pay something like $90/month, and they’ll cover $5000 monthly in expenses for inhouse care for 6 years.
    A lot of variables, so don’t take those numbers as givens.
    The company was Unum, and they aren’t accepting new policies, but there are probably similar.

    The k-12 district I work for has offerred ‘cancer protection addition’ the past few years.
    I’m hitting 50 in Sept, so this year I added the cancer option on my benefits options.

    Probably a bit of a different perspective, but that’s what I got…

    Greg

    • retirebyforty May 31, 2013, 3:21 pm

      I increased my life insurance with my employer’s plan when BRB40 came along.
      Yeah, it’s much easier with single folks. For me, I’m opting for cremation. Quick an easy.
      Thanks for your advice. I’ll get some quotes and see.

  • Chris May 31, 2013, 4:50 am

    Personally I would get some life insurance on yourself, even if it’s $250k, that’ll cover paying off the mortgage and then your wife could more easily manage other things including maybe taking some time off due to your passing.

    I carry life insurance on my stay-at-home-wife for the same reasons. I’d be able to be there to try and deal with the loss and also to help our 4 kiddos work through the loss, if that were to ever happen.

    Obviously I hope that I never, ever have to use it, but as the mortgage gets paid off, I will most likely keep a very minimal policy to cover any funeral expenses on either myself or my wife.

    • retirebyforty May 31, 2013, 3:22 pm

      Taking some time off would be good. It would be tough to take extended leave though. Hopefully, she’ll just use the money to help get things moving again in the right direction. Maybe hire a nanny for a few months.

  • Kevin May 31, 2013, 5:17 am

    Thanks for this topic. How much, what type and what will cost are always the issues with insurance, not whether you should have it or not.

    The thing that concerns me is your reliance on Social Security benefits. The SS statements even come with a “warning” that under the current model the system will run out of funds if changes are not made, be it reduction in benefits or extended retirement age, just to name two popular options.

    I think it’s hopeful, but would be cautious about including Social Security benefits at their current levels in any retirement calculation.

    Thanks for the article. Gives me things to contemplate and goals to shoot for.

    • retirebyforty May 31, 2013, 3:24 pm

      Thanks for your input. Social security is a bit worrying for sure.
      Hopefully the changes will not affect current participants that much.
      I see you point though and it’s another push toward getting life insurance.

  • Moon May 31, 2013, 6:43 am

    I do have life insurance through work for my husband. I pay about $20/month and got him about $650,000 paid out (depending on my cause of death it can be less). I also have about $100K in retirement that my husband is the benefitiary. As you know my husband is disabled and requires 24 hours care if I am not around, my goal is that he will still be working when I die and the money he gets from life insurance will be enough to pay off the house and hire help for at least 10 years (He makes pretty decent salary so I am hoping he can just use his money to pay bills and save for retirement while the proceed from the life insurance can pay for everything else). I also would like him to give 10% of what he gets to take care of my mother. My parents in law have been telling me not to worry about that (they know what it needs to take care of my husband with his situation) and they will make sure he is well taken care of, but I still think this is my responsibilty and we always debate on increasing the life insurance coverage (he wants less and I want more).

    Now he didn’t really get much life insurance for me. He grandpa bought him a $40,000 policy with now my name on there, I also got him signed up thru my work for like a $45,000 spousal policy. With his situation I don’t think it will be easy to get life insurance for me although he is probably healthier than I am! I guess I am not going to worry about it too much since 1) We don’t have kids to worry about so I can continue to work when he passes away and take care of myself 2) he has about $400,000 in his retirement saving in which I am the benefitiary.

    I didn’t take Social security survivor benefits into consideration at all and don’t plan on doing so. I assume we just won’t get any (which we probably really will get at least some, but we just don’t count on it). You see life insurance calculator doesn’t work for our situation either.

    • retirebyforty May 31, 2013, 3:27 pm

      $20/month for $650,000 is very cheap!
      Thanks for sharing. Hopefully you will stick around with us for the next 40 years though.
      Why can’t you take social security benefit into consideration? I guess I trust the government too much.
      I’ll need to rethink that.

  • Great considerations, and clear insight. There is also the psychological aspect to consider, which gives a peace of mind that isn’t easily quantified in terms of assets.

  • John S @ Frugal Rules May 31, 2013, 8:00 am

    I personally would go for the life insurance. Like Jeff said, you should be able to get a pretty decent policy without much in terms of cost. We both have some hefty coverage, all in term, through several different providers. The cost is worth it in the event that my wife or I would pass early.

  • Pretired Nick May 31, 2013, 8:18 am

    Good overview. My wife and I both have $500,000 term policies for 20 years. It’s about $90 for both of us. Our goal was just that the survivor would have the cash to be able to luxuriously get Pretired Baby to adulthood. I’m a little torn about whether it’s worth it or not. I guess it’ll be worth it if one of us kicks the bucket.
    I would disagree about the sign-up process being easy. It was a very miserable, invasive experience. Many very personal questions are asked and in my opinion much of what they were asking was a set-up to get out of paying later by saying you lied on the interview, even though it would be impossible to accurately remember everything they asked for.
    If you’re on the fence about it, you might scale down your investment so there is a decent “Joe is Dead” fund available when the time comes, but it doesn’t need to be a giant windfall.

    • jim May 31, 2013, 10:34 am

      What leads you to think they were asking questions as a “set up” to get out of paying later?? What company was that?

      Denials of death claims by life insurance companies are very rare. Its not like health insurance or auto claims.

    • retirebyforty May 31, 2013, 3:30 pm

      I got the questionnaire from my insurance agent and didn’t fill it out yet. I’m not looking forward to it.
      I think $250k will be pretty good for us. It will keep the household running for quite a while without big changes.

      • jeff Rose June 3, 2013, 9:00 pm

        Many life insurance companies are going completely digital. You complete a phone interview and then digitally sign verifying your responses.

        As far as a “set up” remember that the insurance company is on the hook for what could be a very large amount money. Asking questions regarding your health, lifestyle and other financial considerations is protecting them.

  • sin camisa May 31, 2013, 8:22 am

    We have $400K each. Calculated to en by the time both kids were late/mid teens (no need for daycare anymore). The home will be paid for by then.

    I agree, they asked a ton of questions probably to get out of paying out later.

  • Reader May 31, 2013, 9:28 am

    “College: $250,000?”

    Where have we gone with the college costs??? It is an insane amount to spend on a college. In my opinion, if your kid is smart, he will be just fine with a cheaper college. If he is not, it won’t benefit much even if you send him to Ivy ones.

    • retirebyforty May 31, 2013, 3:31 pm

      Yeah, that’s crazy. Hopefully he’ll be able to get some scholarship. It would be nice if he was smart and could get into an Ivy school. 🙂

  • krantcents May 31, 2013, 1:27 pm

    The short answer is yes! If you die at the wrong time, you don’t want her to have to unload the rentals. It could be right after another real estate bubble. Second, making decisions (financial or otherwise) at the time of death is bad. You want her to have time to take care of these things. A 20 level term will expire at 60 years old, you may want to go with a 30 year policy and just let it lapse if you don’t need it.

  • Anton Ivanov June 1, 2013, 10:27 am

    I’m not an expert on life insurance by any means, but it does make a lot of sense for you, judging from you circumstances and the commentary Jeff provided. You are essentially purchasing peace of mind for you and your family for a pretty low monthly payment.

  • [email protected] June 1, 2013, 2:52 pm

    Not really relevent to life insurance, but I guess relevant to the topic in some way related to death. It’s a topic nobody wants to talk about.
    I was at brunch a few months ago, and one of mom/dad’s friends mentioned what she wanted for her funeral music.
    I forget what it was, but it got me thinking….
    After you’re gone, how do you want to be remembered?
    I’d like my funeral music to be Joe Diffie’s ‘Prop me up by the jukebox’ song.

    • retirebyforty June 1, 2013, 2:54 pm

      I haven’t thought about the music much. I just want a cremation and for Mrs. RB40 to dump my ashes in the Pacific Ocean near Hawaii. It will give her a chance to get away and relax in Hawaii for a few days.
      Maybe Van Halen – Right Now. 🙂

  • mary w June 2, 2013, 4:17 pm

    Double check one thing WRT Social Security. I *think* (but am far from sure) that the amount of survivor benefit Mrs. RB40 would get to keep is offset if she continues to work. I know that if you are under full retirement age and continue to work your SS is offset 2 to 1 after you earn $14K or so a year. I *think* that the offset also applies to survivor benefits.

  • simple living June 2, 2013, 8:25 pm

    Interesting topic, I’ve noticed a lot of the blogs I read are currently discussing insurance. My take on it is that it is a must. One of the biggest obstacles that hold people back is the costs. There are always creative ways to find money to pay for needed costs.

    In Australia there is a way to have your insurance paid through Superannuation (equivalent to a 401k), this is from pre-taxed dollars and doesn’t affect current cash flow. But with most things these type of decisions must be made only when fully informed about how it works.

    I’d say for anyone thinking about insurance, get it…you don’t have to start with extravagant cover in the beginning, something is better than nothing and you can always increase the amount as your financial situation improves.

  • QTL June 3, 2013, 6:07 pm

    You really don’t need it. But if you are still planning to look for $250K in term insurance, be sure to shop around. Policies from many well-known companies are just not competitively priced. By comparison shopping you can save up up to 70%!

    Visit a website where you can compare life insurance prices. You enter the amount you want and how many years of coverage you want and then you can see quotes from dozens of insurance companies.

    QualityTermLife is one of the better sites where you can easily calculate your needs, and then find online life insurance quotes from over 50 top-rated companies.

    If there are loved ones in your life who depend on you financially, look into it today. It’s easy and free.

  • Paul @ The Frugal Toad June 5, 2013, 8:35 pm

    Most people look at life insurance for income replacement, but as you mentioned Joe there are many expenses when you have children: college, marriage, daycare, and the list goes on… I say have your Insurance Agent prepare a comprehensive insurance needs analysis. Do yourself a favor and be sitting in a chair with a nice cold beverage before you read it! The important thing is to start with an affordable term policy and add to the coverage when you can.

  • Good post and from what I read Jeff did his usual great job of analyzing your situation. His comment about life insurance providing financial flexibility is key. To be upfront I do not sell life insurance so that is not clouding my comment here.

    I think that at your age and with a young child that you would be foolish to hesitate on this decision and to consider anything less than a $500,000 term death benefit. These are both such “no-brainers” I’m not sure why this level of analysis is even needed. Just fill out the application and move on Joe.

    I applaud your overall diversification of your investments, but one flaw in your logic that I see is the asssumption that that the rentals can be sold to pay off the mortgage on your home. This may well happen, but as you know real estate is illiquid and can fluctuate in value.

    Additionally you should be looking at a similar policy on your wife even if she has life insurance via work. What if she leaves? Not having coverage outside of the workplace is not a good idea in most situations that I see. Buy the coverage before it is needed, what if you want it later and her health situation changes?

  • Felix Lee June 8, 2013, 9:24 am

    That was really a lot of consideration you made before making the decision of getting a life insurance. But if it is not too heavy for you, then why not have it just to be extra sure of your family’s welfare.

  • Tyler Ramsey June 18, 2013, 7:09 am

    I am 26, married and just had a beautiful baby girl. My wife and I were both carrying $250,000 term policies before the arrival of our little girl. After she was here, I started thinking that $250,000 of coverage on myself was not enough.

    I started thinking about her college, paying off our mortgage and cars, and realized I needed to pretty much double my coverage. I took out a $500,000 policy on myself to protect my wife and child in case something would happen to me. This gave me some assurance that my wife and child would be taken care of for many years to come.

    For me life insurance isn’t just a peace of mind, it is a necessity!

  • liran June 19, 2013, 9:02 pm

    Thanks for sharing this discussion. As Jeff said there is a ton of misinformation on the web, the key is to assess your specific situation like you did here and figure out what makes the most sense. Have an agent you trust to bounce ideas of is definitely helpful.

  • termlifemax August 23, 2013, 12:48 am

    When you are choosing the best company to insure you, it is important to check on the prices of the policy you need. Term life insurance rates vary from one company to another. Thus it is vital for you to get the policy cover from the provider who is offering the most affordable rates. This is an advantage for you as you can be able to save more for other needs. Also this will allow you to go for another term when the current one expires.

  • termlifemax August 23, 2013, 1:05 am

    When you live a healthy life style, you gain access to good rates for the policy cover from one of the term life companies of your choice. You can live a healthy life style by observing a healthy eating habit. This helps you to reduce chances to getting sicknesses like high cholesterol levels in the blood. It is advisable to avoid smoking and if you do smoke, it is advisable to stop before applying for the policy cover. Smoking predisposes the person to different types of illnesses such cancer. Risky games are enemies to you when you want to get a cover for a period of time.

  • Larry @ You and Your Money November 10, 2014, 7:41 pm

    Hi Joe

    Thanks for the interesting post, its always a difficult decision no matter what type of insurance you are buying. But I think in the long run if you can afford it life insurance is worth it. Better to make a small sacrifice now than to leave your spouse and kids behind with a bigger financial burden.

  • Ty Stewart June 9, 2016, 8:54 pm

    The amount of life insurance needed will always be a topic of debate. I do think it’s hard to argue that there are too many situations where NO life insurance is needed. The flexibility and wide variety products make there a likely a fit for most situations. These days the underwriting process is also getting much simpler and faster for many policies. This removes a barrier or an excuse why people delay getting the coverage they know they need.

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