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3 Things to Consider When Purchasing Life Insurance

I have a confession to make: I have probably searched for life insurance quotes at least 5 or 6 times in my life, but I’ve never pulled the trigger.

The reason I have never decided to purchase a policy is because I’m having a really hard time determining how much insurance I actually need. There is no right answer, but there are definitely things to consider.

First of all, you obviously have to consider the price. It’s good to get quotes from a lot of different companies and to make sure you get the best price. I’ve looked at places like State Farm, GEICO, Liberty Mutual and others. If you live in Australia you might look at Lifebroker or other Australian companies.

As I am thinking about life insurance to protect my fiancee financially if I were to pass away, here are a few considerations I’ve been throwing around.

Does Your Employer Offer Life Insurance?

One of the benefits at my job is a life insurance policy equal to one year of my current salary. Let’s pretend I make $60,000 a year. In that case, if I pass away my fiancee would get a $60,000 check from my work.

family
photo credit: andrewmalone

While I would eventually like to raise this to a higher number, it is nice to have this fallback option that doesn’t cost me a dime. As long as I stay with this company, I have a fairly decent life insurance policy already.

It’s important to remember that this is only available to me as long as I remain employed with this company, so it’s not something I can necessarily count on in the future. They could fire me at any time, or I could quit if I find a new job.

The main benefit of this policy is that it allows me to wait until I finish my research and settle on a policy, while still having a little bit of insurance to fall back on.

What Will Your Family Look Like in a Few Years?

At first I thought, I can just get a small policy that my fiancee could use to pay off our house and all her student loans. That would be more than enough to give her a comfortable life. Then I remembered that it won’t just be me and her for long.

When you are looking at a term life insurance policy for 10, 20, or 30 years, it’s important to buy a policy that will support any family you may have over that time period. If you are going to have or adopt children, the amount of insurance you purchase will need to go up, especially if you are planning to pay for your kids’ college.

What Do You Want for Your Surviving Family?

Finally you have to ask yourself the most important question: what do you want for your family if you pass away. I’ve thought about this quite a bit and this is what I’m starting to settle on:

  • Enough money to pay off all debts, including our mortgage. This is about $200,000 at the moment, but this isn’t our forever home. Our next home will probably more expensive, so I should probably look at about $300,000.
  • $100,000 for my fiancee as a cushion to help her transition to life without me. She could use this money to go back to school if she wanted, or she could just use it to supplement the income she gets from her job. Her expenses will be lower because the mortgage and all debts would be paid off, so this should last a long time. It could also help pay for a nanny or daycare so she can work without worrying about caring for our kids (that we hope to have one day).
  • Another $100,000 to put in a trust for my kids. I’d probably have to set up some rules that restrict them from accessing the money until they reach a certain age and/or meet certain conditions. I haven’t put much thought into this yet, but I could basically just trust my fiancee to decide when the kids deserve to withdraw from the account.

Based on this assessment, it looks like I’d need a $500,000 policy. I’d probably look at a 20 or 30 year term, because in the next 20 or 30 years I expect to have a net worth over $500,000 and at that point I would have enough money saved up where I wouldn’t need an insurance payment to provide for my family.

Readers: Do you have life insurance? How did you determine how much you needed?

4 thoughts on “3 Things to Consider When Purchasing Life Insurance”

  1. Hmmm….
    This is an interesting way to do the analysis. Usually when people discuss how much insurance they need, the insurance is supposed to be used to support your loved ones by replacing your INCOME. Yes, a lump sum to pay off the house, pay for college and your final expenses is excellent and often included. But that is the lower figure. If you don’t plan for income replacement you are planning on your spouse eventually taken a hit to their lifestyle-spending or you are planning on them getting remarried and replacing your income that way.

    Let’s assume that one wanted their spouse to maintain their lifestyle without having them HAVE to take on another job or get remarried. Let’s also assume your example of replacing a $60,000/yr salary. Let’s assume you could find someplace that would take a lump-sum and pay a fixed % return, say 5%. (Not outrageous in todays world for an annuity) $60,000 / .05 = 1.2 million. And this doesn’t factor in the 60,000 will be annually winnowed down by inflation. Your STARTING point before adding in paying off the mortgage or college educations should be around 1.2 million. That would leave the surviving spouse economically neutral to your death. Without replacing your income the survivors will eventually struggle.

    1. That’s definitely one way to look at it.

      I don’t look at it that way for a few reasons. First, my current income is being used to pay expensive bills like the mortgage and student loans. Those disappear thanks to the life insurance policy, so her expenses would be lower when I’m dead than they were when I was alive.

      Secondly, my fiancee is a beautiful woman and I’ve told her that I would love for her to re-marry if anything ever happened to me, so I do expect she would add a second income at some point.

      Finally, I’m not looking to replace my income from the day I die until the day she dies. I’m looking to pay off debts and give her some cushion to adjust to life without me. If I were looking to replace my income for 50 years, I would definitely need a bigger policy.

  2. Nice post. I think it all comes down to your insurance objectives. Using your example, you could justify having anywhere from $500,000 to $2 million of coverage, depending on how much income you want to provide for your spouse and for how long.

  3. I’m in a similar situation where I don’t know quite how much insurance to buy. I noticed in your post you talked about a few future increases what you would want to cover with your policy (larger house, kids, etc…). Since none of these currently are in the picture, wouldn’t it be more cost effective to take out a policy for your current situation, and then increase it if/when you have kids, buy a bigger house, or any other additional expenses you want to cover?

    I don’t know a lot about buying life insurance but it seems wasteful to have coverage for ‘what ifs’ that may or may not ever happen, causing you to be over-insured. Kind of like buying car insurance for a more expensive car in that you plan to buy rather than insuring the car you currently own.

    Maybe the added coverage only amounts to a small premium bump and it’s easier to add that coverage at the inception of your policy rather than after it is initiated. In that case then it probably makes sense.

    Have you found any information about whether it’s better to plan ahead for these scenarios or just adjust when necessary when doing your research into buying life insurance?

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