Monday, March 21, 2011

Life Insurance

Do you have life insurance?

Life insurance is one of those budget line items that is NON-NEGOTIABLE. You must have it if you are married, have non-adult kids, or have anyone who financially depends on you. If you come to me for budget guidance, I will include in my questions something about life insurance. If you think things are too tight to pay for life insurance, they will be tighter if the main breadwinner passes away. Things will be tighter if medical and funeral expenses are thrown into the lot. Things will be tighter if you must hire a caregiver for your children. Life insurance is a gift and a necessity.

WHO should have life insurance? Anyone who is married, has kids, has anyone that depends on them. Some single people may have life insurance to cover burial costs and special requests (i.e. care for pets).

WHAT KIND of life insurance should I have (or not have)? You should have "Term" life insurance,  20-year term or 30-year, if you can get it. "Term" means your life insurance will be a flat rate every month for 20 years (thus called "20-year term") or 30 years (for "30-year" term).

There is a kind of life insurance to NOT get. AVOID and DO NOT get whole life insurance, universal life insurance, variable life insurance or any kind of life insurance that has any sort of investment component. I will cover this in a later post.

WHERE do I find life insurance? Look in the phone book for an insurance agent who sells term life insurance. (Ask them if they do; you want to avoid any other type of life insurance but "term".) Agents have access to a database of several providers and can find the best rates from a bunch of different companies. I suggest you contact two or three different agents because they all have different companies in their databases, then compare their quotes.

I am not a fan of work-provided life insurance. You change jobs or get laid off and there goes your benefit, leaving you scrambling to get coverage at an older age, or at worse health, and at a more stressful time of your life. 

I will add here that some organizations (like clubs, banks or credit unions) offer small life insurance programs as part of their free "members" perks. At my bank, the perk is a $1,000 coverage. Obviously, this is miniscule, but I went ahead and signed up for it since it was free and would add to insurance I already have. Take advantage of these complimentary programs, but be aware that later on they will ask you to buy bigger coverage through them. Do not do it; there is a reason they can offer these small gifts for free: their big coverages are over-priced.

WHAT should I expect in applying for life insurance? You will be asked a lot of questions about your lifestyle, your family health history, and your own past medical history. The insurance company you choose will schedule an in-home physical. No worries; all the physical involves is a urine sample, a blood sample, a blood pressure cuff, and a weight scale. A couple weeks after your physical, you will be contacted with your results and with the cost of coverage being offered.

HOW MUCH insurance should I get? Get an amount that equals ten times your income level. Some people balk at this suggestion thinking I am trying to catapult them into some extravagant Paris Hilton lifestyle. But this amount is not ridiculous when you realize it is not for spending but for income-generating. Properly investing an amount equal to ten times your current income, can earn you (or your survivors) enough interest to live on that is equal to the income you lived on before. For example, if you currently live on an income of $50,000 per year, you should get at least $500,000 coverage. In the right investment vehicle and assuming a 10% average return, you (or your beneficiaries) will be living on $4166/month (the same as $50,000 a year), without reducing the principal in the investment.

If you cannot afford to get a policy that pays out 10 times your current income, go for one as close to the amount as possible. Five years down the road, when you are in a better financial position, apply for another policy to make up the difference. For example, if you cannot afford to get a $500K policy, and are currently only able to get a $300K policy, go for it. Two to 5 years later when you are free from debt, apply for the additional $200K.

HOW MUCH will insurance cost? There are many factors that determine the price of your individual insurance. Gender, age, health, occupation, and lifestyle are just five that come to mind. Depending on the answers to these and other questions, your insurance coverage can be cheaper than you think! But the only way to know for sure how much it will cost you is to go ahead and choose a company to work with so they can get you an accurate quote.

~ Gender - There isn't much you can do about this one! But just so you are aware, assuming all things being equal, women tend to get cheaper rates than men since they have a history of outliving their male counterparts.  
~ Health - Take good care of your health. Maintain a healthy weight and a healthy state of mind. Avoid poor habits that weaken your health, such as smoking.
~ Age - Do not put off getting life insurance with the intent of "getting in better shape first". You don't get younger, so insurance doesn't get cheaper. The policy I got in my mid 20's costs me $9/month. The policy I started just a few years later costs me $26/month (though part of the rise in cost was to include a higher payout).
~ Occupation - The riskier your job (say, comparing an oil driller to an accountant), the more chances you have of injury, therefore the higher your cost.
~ Lifestyle - If you travel a lot or participate in "extreme" hobbies, such as cliff jumping, you can expect your cost of coverage to reflect such risks.

Life insurance is one of those things that seems unnecessary when all is well but is vital when the life of someone you depend on is gone. If you or a spouse does not have it, get the process started today!


  1. We have coverage for our kids too. It seems unlikely that you'd need it, but well.. you know. Just enough to cover medical/funeral expenses. You can add your kids to your plan for pretty cheap.

    We started with term and then added others later. I'm curious to see your post-to-come and why they're the no-no's. I'll stay tuned.

    I agree that life insurance is a NECESSITY right away, no excuses. Great post.

  2. I do also have term policy that I recently bought. So far I just have coverage for both of us and we are still panning to add some more coverages as when our budget allows. You have made an excellent post about life policy and shared a great source of information.
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  3. Kristen, insurance for children is a good idea for the reasons you mentioned. We are blessed that my husband's and my insurance includes a rider for children at no additional charge.

    Amelia, good for you on getting life insurance! It's just good sense to get SOMETHING in place, no matter how small, as soon as yesterday!