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Life Insurance Part 3: Is Term Life Insurance Right For Me?

February 28, 2008 by Pinyo.

Okay, so I have walked you through the process of how to determine the right amount of life insurance coverage in part 1, and why whole life insurance doesn’t make good financial sense in part 2. In the 3rd part, I am going to provide you with my analysis of term life insurance.

Life Vests Beach

Photo by janzedrik via Flickr

Leverage

Based on the premiums:

Description	My Policy, $380,000	Her Policy, $290,000
20 years term, elite	$30.69	$20.58

My 20 years, $380,000 coverage will cost me a total of $7,365 (or, an opportunity cost of about $18,000 — i.e., if I invest $7,365 and earn 8% return on investment per year on average).
My wife’s 20 years, $290,000 coverage will cost her a total of $4,939 (or, an opportunity cost of about $12,200).

Unlike whole life insurance where the opportunity cost easily exceeds the coverage, term life insurance provides risk protection at minimal cost. This is what we call leverage. Basically, I am using $7,365, or less than 2% of $380,000, as leverage against catastrophes.

Projecting Needs of Dependents

The key decision making factors for us is our age, how old we’ll be at the end of the term, and who might be dependent on our income during the term.

Right now

I am 34 years old and my wife is 28, and we also have a 2 months old son. We are planning to have a second child within the next 4 years. Additionally, my parents are 62 and 64, and they may need our financial support during their retirements. Her parents are also in a similar situation. Lastly, we have about 10 more years to go on our current mortgage.

In 20 years

I would be 54 years old and my wife would be 48. Our son would most likely be a junior in college and our second child a freshman. Our parents would be around 80 years old. Lastly, we would be done with our mortgage unless we decide to upgrade.

In 25 years

I would be 59 years old and my wife would be 53. Both our children would be done with college and financially independent. Our parents would be around 85 years old.

In 30 years

I would be 64 years old and my wife would be 58. We shouldn’t have to worry about our children, nor parents, at that point.

Why 20 years and not longer?

Based on the projections above, it looks like 20 years is the best choice for us, due to these key financial obligations:

Saving and/or paying for college expenses
Subsidizing my parents post-retirement living expenses
Paying for mortgage

I am not worried about going longer than 20 years because there’s probably no one left to depend on our income. Our children would be independent, and our parents probably won’t need the money by then.

What about inflation?

I am not worried about inflation either. In the 20 years span, I will be adding money and building up our retirement funds, college education funds, and our net worth. This means that $380,000 or $290,000 don’t have to stretch as far as we get older.

The Verdict

Looks like I will be switching from my employer’s term life insurance, and get our own to cover both my wife and I. However, I am not jumping the gun yet. I am not sure if the estimate of $380,000 and $290,000 are good estimates. I’ll be recalculating our coverage needs one more time and then run the numbers through Netquote.com and InsureMe to get the best price.

Other articles in this series:

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5 Comments

Thrice2k3, 28. February 2008, 9:24

As you are determining lowest pricing via Netquote… are you taking into account the lifetime of the company providing the insurance? This is a long term investment… there should be some examination as to whether or not they will be around in 20 years, no?
Pinyo, 28. February 2008, 9:27

Thrice2k3 - Welcome to Moolanomy. Thank you for pointing that very very important factor out. That would definitely be part of my decision making process. When it comes to insurance, it’s worth it to pay a little more for companies with good stability and track record.
AJ, 28. February 2008, 18:03

The general rule-of-thumb is 8-10x your annual income for the primary breadwinner, so your numbers seem a little low. Do shop around for good rates from a well-rated company, you want the AM Best ratings, and there are others as well.

The cost you listed for 380K 20-yr term seems high. I’m 35 yo male, good health, non-smoker, and pay $26/mo for $600k through USAA. I understand not everyone is elgible for USAA, however when shopping I found several other companies within a few dollars of the USAA quote.

Good luck!
Ron@TheWisdomJournal, 29. February 2008, 4:54

One thing to beware. Make certain your new coverage is in effect before you drop the old. I have seen example after example of people who drop the old coverage, then get turned down for the new because of a newly discovered health problem when they went to get their physical.

Also, cancel the old coverage in writing. You probably agreed to so this when you signed up for it. For employees, sometimes you aren’t allowed to cancel until a certain point in the calendar year. Chances are, you agreed to this when you signed up.
Pinyo, 29. February 2008, 7:12

@AJ - I think it’s low too, that’s why I want to run the numbers one more time. And I agree that the premiums seem high. Oh, I wish I can get USAA stuff. My brother-in-law’s parents are in the Air Force and he’s getting killer deals

@Ron - Good point. My coverage will be in effect until the end of the year and I can’t drop it. So this gives me some time to decide.