As of this month, both Deb and I now have life insurance coverage. Life insurance is not something that’s commonly discussed and is an understandably awkward topic, yet one that frequently crosses people’s minds. So we thought we would use this blog post to share some of the thinking that went into our decision, the policies that we got, and perhaps through this process answer some questions that you may have as well.
Do I Really Need It?
I would make a terrible life insurance salesman, because I don’t believe that everyone needs life insurance.
The only reason why we would need life insurance is if there are people dependent on us who would be adversely affected if we passed away and we don’t have enough other assets to meet their needs.
That last part of the sentence is important, because the goal is to build up enough assets in investments and savings so that we don’t need to buy life insurance. However, most of us in the wealth accumulating years of our lives probably could use a little risk transferal to help ensure our dependents are taken care of in case we die before we’ve saved up enough.
Boiling it down, here are some practical considerations about the need for life insurance:
- Wife stays home to raise the kids, and I bring home the only income.
- We have disabled, ill, aging, or other needy family members that we take care of.
- We have big outstanding debts that the family would be liable for should I pass. (Mortgage, car loans, etc.)
- We have kids that we’re paying through college.
Is Life Insurance Wrong?
I know it’s awkward talking about death, and some folks feel that it’s “bad luck” to discuss or plan for our death because it somehow makes us more likely to die. (Often the same is said about creating a will.) I hate to be a bearer of bad news, but we’re all going to die sometime. So we might as well die prepared!
Others, particularly Christians, may feel that it is a denial of our faith to make such provisions for the potential of our death, since Jesus says that He will never leave us nor forsake us, and that He will take care of our needs. To that, I simply say that just like Jesus made provision for John to take care of his aging mother, we should likewise think ahead to make sure our families are taken care of if we were to pass of the scene too. More pointedly, the Apostle Paul says the following in 1 Timothy 5:8, “But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.” Strong words!
Let’s be honest, when a family is left destitute because of the death of a primary earner in the home, who usually ends up stepping in to supply the lack? Family members, the church, or the government, right? While I believe that this is one way that God can provide for His children and also that it is certainly our Christian duty to help other family and church members in need, is it really faithless to make provision ahead of time to care for our loved ones instead of counting on someone else to pick up the tab? Is it any less honoring to God when we manage the finances He’s entrusted to us in such a way that both provide for our household while also reducing the burden on others?
For us in the Crumb Saver household, we have never felt the need for life insurance until the birth of our daughter. Prior to being parents, neither of us were so dependent on the other that we would be totally crippled if we were left alone. During that era of our lives, we could easily have kept working to take care of ourselves.
Once the baby came though, the picture changed dramatically. Instead of each of us being able to work and take care of ourselves, we now were a family of three subsisting on just one income—mine! Looking ahead, we also knew that we wanted to provide for our children’s education, and so we decided that we needed to insure ourselves so to make provision for their education through college. Fortunately, we have no debt so that decreased the amount of risk we were facing and allowed us to get a smaller policy than we otherwise would have needed.
So that takes us to the question that’s probably on most of your minds…
How Much Do I Need?
Dave Ramsey says to buy life insurance for 10-12 times your income. This is based on his assumption that you can get between 10-12% returns reliably from investments so your current income would be 100% replaced by the life insurance. However, I think his expectations for reliable returns are a bit too optimistic and he also hasn’t taken inflation into account. I think the 8% figure for investment returns is much closer to reality (and some would even color me as a hopeless optimist for that number). Factoring in the historical average inflation of 3-4%, in order to fully replace current income from life insurance, you would actually need coverage for something closer to 25x your income. (This is based on the 4% safe withdrawal rate.)
At this point you’re probably doing the math and thinking to yourself, that is an insane amount of insurance! Someone making $50,000 today would need a $1.25 million life insurance plan! Do I REALLY need THAT much?!
Before you tune out, just as it’s possible to be under insured, I think it’s possible to be over insured as well.
Since life insurance is purchased to provide for our loved ones who depend on us, the questions to ask are:
- How much will my family actually need if I died?
- Do I have enough accessible assets to provide this amount?
- If not, what is the difference between the two? That is the amount that we need to be insured for.
Warren Buffett once said something that’s always stuck with me,
Leave enough for your children to do anything, but don’t leave so much that they can do nothing.
I think this can apply to life insurance too. Life insurance should cover the necessities so your dependents won’t starve, but it should be just enough to put them in a position to provide for themselves. It’s to cover needs, not to make someone rich!
So in our home, we took out a $500,000 term life policy for me, and a $250,000 policy for Deb. Assuming 8% returns and a 4% safe withdrawal rate, my plan will produce $20,000 annual income while Deb’s will produce $10,000. At our current level of spending, $20,000 should cover all living expenses so Deb can continue being a stay-at-home-mom to raise our baby. Another way to look at it is that $500,000 could also fund $62,500 per year for 4-year college degrees for 2 kids (assuming we have another one), were that to be the primary need. We chose to purchase a policy for Deb too, even though she’s no longer working, simply for the fact that childcare expenses will inevitably go up were I to become a single dad, and this will provide some supplementary income.
We both got 25-year terms for our policies. We figure that if we have more kids in the next few years, this will cover us for the length of time that they will need to finish college.
How Much Does This Cost?
The annual premium for my $500,000 policy is $339, and for Deb it’s $214 for her $250,000 policy. So in total we will pay $553 per year, which factors out to be $46 per month. (Monthly payments are more, so that’s why we chose to go with annual payments.) Over the life of the 25-year term, assuming we won’t need to use these policies, we will pay a total of $13,825 for $750,000 of coverage. That’s like paying $18 to insure something worth $1000 for 25 years. Not a bad tradeoff for transferring this amount of risk, if you ask me. (Of course, your results may vary depending on your needs, health, age, state of residence, etc.)
Where We Shopped
We purchased our policies through the Dave Ramsey-recommended Zander Insurance. We looked around at other brokers, and we found that Zander actually did find us the best prices and they only offer level term plans, meaning all their plans have a fixed premium for the length of the term. Some term life insurance plans have variable premiums that fluctuate with time, and it’s not always easy to see the difference when comparison-shopping.
Using the online quote generator with Zander, the cheapest policies for both Deb and me were from AIG. We got to select what “health class” we belonged to (meaning how healthy we were), and the healthier we were, the lower the rates. Deb easily qualified for the highest health class, but I had a major health incident in 2007, which is now classified as a “pre-existing condition” for insurance purposes. Due to that, even though I was in great health otherwise, Zander recommended that I apply for the lower and more expensive “standard” health class. (More on this later.)
The application process was painless for the most part. We filled out their online application then they sent a nurse out to our place to take some blood samples, urine sample, some basic measurements (height and weight), and to administer a short questionnaire. (This was to confirm that we were telling the truth about our health class.) That entire procedure took only about 15 minutes total. After that, it took a few weeks for the underwriting department to do their research where they go through our medical records and determine whether we were good risk for them to take on.
As suspected, Deb got the lowest rates possible because of her health. But amazingly to me, AIG upgraded me also to the highest health class after doing their due diligence, despite my pre-existing condition! I was pleasantly surprised to know that, and my premiums got a tremendous haircut because of it.
Remember, it always pays to be healthy!
Term vs. Permanent/Cash-value/Whole Life Insurance
As I mentioned above, Deb and I purchased term life insurance. Some of you may be curious to know why we didn’t go with a permanent or cash-value or whole-life insurance (or whatever else they might go by). The answer actually is quite simple:
I just didn’t understand permanent life insurance.
Term life insurance is basically what you would think of when you think life insurance. You pay a premium to an insurance company, and they make a payout to your beneficiaries if you die. You’re covered for a specific term. As long as you pay, you’re covered. If you stop paying, you’re no longer covered. That’s it. Simple. It’s simpler to understand than car or homeowners or health insurance. (ESPECIALLY health insurance! Another post on that in the future.)
Permanent or cash-value or whole life insurance on the other hand packages an investment product in with your life insurance plan. I’ve made multiple attempts to get a better understanding of how this type of insurance works, and perhaps I’m just not smart enough, but I never feel like I really “get” how they work. They are so complex, the information available online is so sketchy, and the fees are so non-transparent that I’ve just had to put my hands up and invoke the rule, “Don’t invest in anything you don’t understand.” Perhaps some of you out there have untangled permanent life insurance and all of their flavors, and you can help enlighten us in the comments below.
So why did we get term life instead of permanent life insurance? Simple, it’s the only type of life insurance we actually understood.
Life Insurance: The One You (Really) Wish You Never Need
In an ideal world, we wouldn’t ever need insurance—ESPECIALLY life insurance. But our world is far from ideal, and so I believe it behooves primary caretakers of families to think carefully about whether our families would be well served for us to have life insurance.
It’s one of those things in life that we wish we never need, but will be glad we had it if we did.
So what are YOUR thoughts on life insurance? Worthwhile? Worthless? Let us know in the comments below. (And perhaps you can even help demystify for us how permanent life insurance works while you’re at it!)
Sign Up for Free Delivery
Get fresh content from us delivered straight to your inbox, spam free!