How Much Life Insurance Do I Need?
Last year, I switched my car and home insurances to Liberty Mutual and started an umbrella policy with them as well. This move netted me a saving of over $1,000 per year and allowed me to pay the premium monthly without any fee. Last week, I agreed to meet with the sales agent to discuss life insurance policy. Although, I already carry a term life insurance policy through my job that pays 7 times my annual salary in case of my death, I am always looking for better option.
In this part one of the series, I’d like to go over the process that I went through with the sales agent, which I felt was interesting and educational. In part two, I will go into my mathematical analysis to determine what type, if, and how much life insurance I should buy.
Life Insurance Needs Worksheet
To determine how much coverage my wife and I should buy, we completed the Life Insurance Needs Worksheet.
The worksheet examines the 4 general factors:
- Date of Birth — As we get older, life insurance becomes more expensive, because of (1) we are more likely to die, and (2) there’s less payments for us to make (i.e., in case we buy whole life insurance where we pay the premium until 65).
- Gender — Even if my wife and I are the same age, her premium will always be lower than mine because (1) women live longer on average and (2) men have more risk factors.
- Health — There are several health classes for Liberty Mutual — e.g., Elite, Premium, Standard, Sub-Standard, etc. People with the best health profile gets the best rate. The sales agent felt that my wife and I should be eligible for Elite because we are of average weights for our heights, and our blood pressure and cholesterol levels are normal.
- Smoking vs. Non-smoking — This one doesn’t need any explanation.
The worksheet also examines 7 specific factors:
- Final expenses fund — This is the amount we need immediately to cover final expenses — e.g., funeral plot, embalming, casket, etc. He estimated this to be about $15,000 per person. Brip Blap has a good piece on preparing for the cost of dying.
- Emergency fund — This is for unexpected bills and expenses. I thought it was strange that emergency fund was included in the worksheet, and the sales agent did in fact said to skip and ignore it. Personally, I believe everyone should have an emergency fund, and it shouldn’t be part of your death benefits.
- Outstanding debts — Although outstanding debts usually go away with the deceased, there are some shared obligations that the spouse will have to bear. For example, credit cards, installment credit, auto loans, etc.
- Mortgage and rent payment fund — This is the mortgage payoff amount, or an amount sufficient to cover 10 years of rent.
- Education fund — This is meant to partially cover my son’s college expenses. The agent recommended $100,000 to cover 4 years of public college, but I believe this amount should be closer to $250,000 — however, I did stick with his suggestion for this exercise.
- Income Replacement Fund — This is the extra money to keep the living spouse, or the beneficiaries afloat for a few year — it’s not meant to be a lifetime income replacement. The recommended amount is five years of current income. However, the sales agent said two years is the minimum, and that’s what he recommended we start off with.
- Current liquid assets and life insurance — This is the amount of assets that can be readily convert to cash. For our purpose, the sales agent recommended that we exclude the term life policy from my job, my 401k, and our IRAs.
Once we completed the worksheet, it was a simple addition of #1 through #6 and subtract #7. It turned out that I should buy $380,000 to cover my wife and our son, and she should buy $290,000 to cover me and our son.
Options and Premiums
After we determined the coverage amount, we explored the following options for term life insurance, and the associated monthly premium.
|20 years term, elite
|20 years term, preferred
|30 years term, elite
|30 years term, preferred
He also recommended that we look at whole life policy as a supplement to the term life policy. However, he suggested a smaller amount like $50,000 to $100,000 to supplement our term life policy. I appreciated that he openly said buying any more than that in whole life is just a waste of money. Here are the options:
|$50,000 whole life – pay to 65, standard
(there’s no elite option)
|$100,000 whole life – pay to 65, elite
(minimum coverage to qualify for elite)
Our conversation brought up a few interesting points, not all of which we have answer to.
- When I mentioned life insurance through work, the sales agent made a good point which I agreed with: the policy ends when I lose my job — and life insurance is something I don’t want to be without.
- The sales agent mentioned that, on average, Americans buy 7 life insurance products through their life time to supplement, or replace existing one.
- Life insurance payout is tax free to beneficiaries. This means that you’ll need less coverage to replace loss income. For instance, if you want to replace $100,0000, you’ll probably need only $80,000. Here’s a nice marginal tax rate calculator.
- If we can’t qualify for elite, the sales agent suggested waiting a few weeks to get our stats in order. As you can see it’s worth the wait for the differences in saving. Similar idea was expressed on Consumerism Commentary.
- If I die, what happens to my 401k? I did name my wife as the beneficiary, and our son as the contingent beneficiary. I am not quite sure how to answer this myself.
- Similarly, what happens to my IRA?
In the second part, I will be doing some mathematical analysis and share my decision with you. While you wait, here are some other good articles about life insurance:
Other articles in this series: