$1.5 million is a LOT of money. So when I tell people that’s how much life insurance I have on myself, I can almost hear their eyes pop. It’s especially crazy when you consider that my wife and I only have one child and no real debt to speak of (a total of about $16,000 between a car loan and student loans). So what’s the story? Did I get screwed by a sleazy life insurance agent? Did my wife get greedy? Is there some sort of murder plot in the works?
The thing is, the majority of people vastly underestimate the amount of life insurance they need to take care of their families. I’d go so far to argue that if you’re married and have one child, $1 million is the starting point. Add more kids into the mix, add more life insurance (By the way, if you’re just married with no kids, or single, there’s still a case for you get life insurance).
Don’t make future decisions now
Cost is a major factor in deciding on how much coverage to get, but rationalizing a low benefit because of the cost can be to the severe detriment of your loved ones. In order to save a few bucks, you may think, “Oh, my wife stays at home, so I’ll just keep working.” Well guess what, according to Salary.com, a stay-at-home mom is worth about $110k a year. Or here’s another one: “I’ll just get enough to keep the family on their feet for a few years, then life will go back to normal.” Those of you who have lost a spouse, especially those with children, know that life will never go back to normal. This isn’t just about financial security, but emotional safety.
The fact is, no one knows exactly what our needs will be when a loved one passes away. If something were to happen to my wife, I don’t know if I would have the motivation to continue working, at least not for a long time. And if something happens to me, I don’t want her to feel constrained by some arbitrary timeline. I want her and my son to be taken care of for as long as they need it, and I’d rather leave them with too much than too little.
The future is bright—don’t kill it
The majority of life insurance tends to be used for immediate and short-term needs: paying off the mortgage and other debt, covering funeral expenses, and giving the family a little buffer time to get things in order. But why stop there? I mean, that’s certainly not what your focus is normally. What about saving for college costs? What about retirement? What about all the traveling you wanted to do with your spouse? All that still matters to them after you’re gone. You should be just as concerned about your family’s future quality of life when you’re alive as when you’re dead.
What are you buying instead?
One of the biggest rationalities I’ve heard is “I can’t afford it.” But if you can’t afford it, what are you buying instead? Snacks? Movie tickets? Beer? Coffee? I understand that the likelihood of any healthy person kicking the bucket is remarkably low. But it happens, and if you’re unprepared when it does, your family’s suffering will be immeasurable. For my $1.5 million policy, I pay about $60 a month. That’s really not a lot, considering I pay more for my car insurance, which has a max payout of $100,000. Sure, the likelihood of me getting in a car accident is greater than me dying, but still. If I can afford to insure my car, why can’t I afford to insure my life? So if you don’t think you can afford life insurance, take a look at what you’re buying instead. Is it really more important?
Also, if you legitimately worry that you can’t afford it, it’s a lot cheaper than you think. For example, you can start with a small policy around $100,000 for around $10/month.
Beware of employer coverage
As a side note, be wary of putting all your eggs in the employer basket, even if they’re willing to cover you for pennies. The reason is that as soon as you leave that job, your coverage is gone. And if, for some reason, you have to quit your job because you have cancer, or your health changes drastically in some other way, not only is it gone, but now it’s a lot more expensive, and you may not even be able to get it at all. Personally, I take all the free life insurance my employer will give me, and then I take care of the rest myself. Because why would I put my family’s entire future in the hands of someone else?
Why I have $1.5 million in life insurance
No, I wasn’t screwed by an insurance agent. In fact, I sold the policy to myself when I was selling insurance, so I got paid on it 🙂 And my wife wasn’t greedy. In fact, she gets mad at me every time I tell her that my death will make her a millionaire. I actually got the policy before my wife was even pregnant, because I wanted to lock in the rate based on my age and health (FYI if I would’ve waited, the rate would be 50% higher because I’ve gained some weight in the last couple of years). On top of that, though, my concern is to take care of my wife and son for as long as they need it. Could it be that my wife gets remarried a few years down the road (better not be sooner than that) and is taken care of moving forward? Sure. But why would I gamble on that? My job as a father is to take care of my family, now and in the future. Saving is great, but if I can’t protect their future (at least financially), I’m not doing my job.
Do you feel like you have enough life insurance coverage?
I only have my employer life insurance and that is all I will ever have. We have enough saved (and easily accessible) that should either of us pass away the other would be ok with not having to work if they didn’t want to. So we are going to continue to self insure and invest the amount of what the premiums would cost.
Nice! Yeah, if you have enough liquid assets to self-insure, that’s definitely a good position to be in. Although, I wonder what your position is on having life insurance to cover estate taxes.
You do bring up a valid point, however, since the personal exemption is north of 5M we are more than ok. But if a married couple did have more than 10M in assets, then yes, life insurance would most likely be a very valuable tool to pay for the terrible terrible estate taxes.
Ah I should’ve double checked that before I asked 🙂 The last time I was in that industry (a few years ago), there was a lot of talk that it would be set at 1M.
We definitely have enough. We buy term so it is super cheap! I wish more people realized how affordable it really is if you get insured while you’re still young.
Yep! We got ours a few years ago and it feels like we’re paying pennies for how much we’re getting.
I’ve seen way too many people have too little life insurance coverage. It’s interesting to hear their reasons for the low coverage amount – usually the cost – but many do not realize how costly things are and how much money will really be needed if the unfortunate happens. This is especially true if one spouse stays at home to raise the kids.
Absolutely. And the longer it goes, the harder it will be for that stay-at-home spouse to easily get back into the workforce.
I used to have employer only coverage, but then we got hired in (we were part of an outsourcing agreement) and the offerings were slim, so we went out on the open market and both my wife and I have 20 year policies. The timing was actually good because we were both in our 30’s which made it affordable, as the prices will go up as you get older. I have about 10x my current income in coverage, which is a good rule of thumb.
Personally, I’m not a huge fan of the 10x income rule of thumb, simply because there’s no meaning behind it. I prefer the need-based approach, where you actually sit down and talk about what you would want to have taken care of and how much insurance you would need to do that. Glad you were able to get that timing, though!
I just got some quotes last week and was pleasantly surprised as to how affordable it is. I used Quotacy they have a really nice interface and a lot of good information on their site. I’ve been kinda putting it off but I will probably pull the trigger sometime this week. Thanks for the reminder!
It seems like there are a lot of different tools out there. Quotacy seems to be popular among other PF bloggers too. Definitely pull that trigger!
I don’t currently have health insurance, but I’ve once looked into it before and it wasn’t at expensive as I originally thought it would have been.
Not as much as I’d like, certainly. I’m bipolar, so now that suicide is covered… I pay about $50 a month for $125,000 of coverage. Lovely.
But that will pay off the house and give my husband (who is on disability) a year or two to figure out his financial status. I tell him to just rent out the other rooms for extra income. He says he’s not sure he might just take off to roam places. (Increasingly unlikely as his health gets worse, but I don’t have the heart to point this out.) Point being, it won’t mean he’s set for life. But he will get some breathing room.
That was totally awesome! By preparing your family’s future is the best thing to do aside from saving and having an emergency fund.
Technology has made it a lot easier to determine life insurance needs. Make use of some of the powerful features provided by many life insurance websites.
You can find robust Needs Assessment calculators to help you determine how much coverage you should get.
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