Life Insurance

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I just got call from my life insurance company for a review they do every three years. I think the real purpose of the phone call is to try to increase your policy. I've had life insurance ever since my son was born, and since I'm under 40 and relatively healthy, I could get a sizeable chunk of life insurance for a pretty fair price. My annual premium is approximately 0.1% of the payout should I checkout.

Anyway, the guy from the company reviewed my policy, and concluded that I probably didn't have enough life insurance. (Obviously.) He told me that the industry standard is 10 times your annual salary. Now, if that is true, then no, I don't have enough life insurance - I'm short by a few hundred grand.

The question though is this - Is that really the standard? I wanted to have enough that my son would be able to go to college without my then widowed wife having to work three jobs, and of course some more to cover living expenses for them. But my wife is capable of working. And it's not like the policy is necessarily small right now - it's about 6.5 times my salary.

So I'm OK with the concept of having life insurance. If you're married with children, it's probably wise to carry a policy should you kick the bucket. But how much is enough? Obviously, if you don't die during the term any amount is too much. But if you do, you don't want to short the survivors either.

The thing I don't like about life insurance is that when you send in the annual premium, you're essentially betting that you're going to die that year. They give you 1000 to 1 odds if you're right. If you're wrong, you lose the bet, but at least you aren't dead, which I suppose is some kind of consolation.

 

My father was a life insurance salesman -- I suppose in a sense he still is, given that the old coot won't retire completely -- he's 87 years old and still going great guns! What a nutjob.

But I digress. I don't know a lot about the industry''s innards, but I do know that people often undercalculate the costs of their funerals and burials, and they also undercalculate other post mortality costs. My advice to you is to sit down with an agent you trust. Dad wanted old LKD to take over the brokerage, and he tried to teach me a few things until it became clear to him that I simply don't have what it takes to be a 100% commissioned salesman. I did learn about sales from him, though, and what he drilled into me was that having a salesman who actually gives 2 <poops> about you is what most people want. Therefore, a good agent will ensure through word and deed that he is looking out for your best interests. Dad would even share his commission rates with clients when presenting them with options. He's say things like:

Sometimes he's even encourage them to go with A if he felt that it was a better deal for his client. He knew how to close a sale*, but he also respected peoples' desire to take a night or two to mull over some choices.

His lessons imprinted on my mind. I don't know about your insurance load, but I do know salesmen, as I met some real grade A douchebags when accompanying my father to various insurance offices -- guys I wouldn't buy a candy bar from, let alone an insurance policy. Find yourself a good agent who you trust and then have him go over some scenarios with you.

*Which is the skill I lack aptitude for and have no desire to develop.

 

Aldeth,

Minimally you want coverage that covers all your expenses, including Mortgage, Student Loans, Burial, Basic Credit Debt, Car payments, etc... don't leave your spouse hanging in the wind if you kick the bucket tomorrow. You are also a very level headed guy and probably know this already. I also believe you are a professional and make 50k+. Just guessing of course, but let's assume I am right.

So, given the possible income level for you, 500K is what I beleive to be standard. 10x the income level sounds right to me, though when the wife and I were looking a few years back, the insurance rep we went with really pushed just covering your expenses as the necesssity of coverage. The rest he said was extra and only worth it if the costs increase was minimal. We agreeed with him and took out 250K poilcies on each of us. Soon that amount will be overkill as I will own my home in 5 years and be rid of student loans in about 10.

 

Don't forget that for stuff like college, your wife won't be using the money for 10 or 15 years (not sure what age your son is). Inflation will eat into the "real" value of the payout she gets. She could of course invest it but that wouldn't be risk free. I've no idea what the correct level is but if you plan to cover $100,000 of costs you'll need cover for more than $100,000.

 

There is no "standard". It depends enormously on your current financial situation and especially how much debt you have, plus how many kids you have.

Also important is whether you have any "living" insurance. You need more of that than you do life insurance, because if you became incapacitated and couldn't work then someone has to pay to feed you as well.

 

Am I the only one who has a very negative view of insurance companies and feel that they to a large extent are running what is basically scams? Pay them a lot of money but when something actually happens the risk is great that you will not actually get any money? I remember reading the fine print on my personal insurance and it didn't cover any of the common ways of being hurt or killed. Same with cars, the insurance doesn't actually cover most of the stuff that can happen.

In my eyes they are vultures preying on our innate need to get a sense of safety and security. You need some basic coverage but the amount of insurance for everything people are being scared into getting is silly.

I am interested to see how the insurance industry reacts in Japan, if they will actually pay out any money or if they will fight with tooth and nail to dodge responsibility. Would be surprised if they actually pay anything. "It would ruin us, you don't want to smash an entire industry do you?" Probably be bailed out by the government, bah, insurance industry they can't lose. Win-win business model, get people to pay you for nothing.

 

joacquin, I'm not sure if insurance companies are still allowed to refuse to pay out if it's an 'act of God' but they certainly used to! I think a lot of people in Japan are covered specifically for earthquake damage as they do get quite a few over there

 

Oh force majeure is live and kicking as a concept but I think they might have trouble applying it here because as you said I am sure plenty of people had specific insurance just for an even such as this. I still wouldn't be surprised that the insurance companies will claim that actually paying will ruin them and try to wriggle out of it anyway they can.

 

When it comes to life insurance you should consider it the same way you think of homeowner's and car insurance. Only get the amount that you need and be sure to adjust it as situations change. The one thing I can't stress enough is that for most people "whole life" policies are a bad idea. You do not want insurance as an investment you have to think of it like it is an expense. There are better ways to invest then insurance. As to rules of thumb, I have never heard of 10 to 1, you need to be base it on what your liabilities and future expenditures. I'm currently 6 to 1.

 

Life insurance provides your family with an adequate income if you pass away. However, it does not need to be the only source of income. Social security will come into play in this. I think the basic formulation for how much iunsurance you need is fairly simple:

Determine how much you make.
Determine your SSA payout to dependents (on the annual letter you get).
Decide on a realistic interest rate for investments.

Once you have those determine the amount of money you need to acheive an interest payment equivalent to your salary minus other monthly payout (SSA, for example - I also have military retirement). Add to this any burial costs.

This ensures there is adequate money for your spouse. Note, this is a high end here. You can also determine the money (interest and principle) only last for a specific amount of time (such as through college for children).

Talk about the plan with your spouse. For many the best course of action will be to pay off the house and any debts -- this will reduce your interest checks but the payments (usually at a higher interest rate) will be gone for a net positive.

By the time college comes around the principle is still available and could be used.

 

Well, I did compare life insurance premiums to placing a bet that you're going to die. At the very least, I have a very cynical - if not outright negative - view of insurance companies.

Having never died before, I don't have any direct experience with trying to make a claim on my life insurance policy. I was under the impression that there were very few causes of death that weren't covered - specifically the insurance company doesn't have to pay out if you're killed in an act of war, commit suicide, or are killed by one of the beneficiaries of the policy. Seeing as how I'm 36, I'm far more likely to die as a result of a freak accident (car/plane crash or something which is really remote), than I am to die by having a heart attack, cancer, etc.

As for car insurance - I've had nothing but good experiences with my auto insurance. They've never refused to pay a claim. Granted, I've never been involved in an accident where I have been "at fault", but I did have a case some years ago that was classified as an act of God. A car I no longer own, had a tree fall on it during a storm. (No one was inside the car at the time - it was parked.) Other than my $500 deductible, the insurance company paid to get it fixed. (The damage was repairable - the tree wasn't a 3000 ton sequoia that would just flatten a car.) I would assume if a tree fell on me and killed me that I my life insurance company would pay up.

My son is 3 so we are talking about 15 years here. There are extremely low risk investments you can look into if all you're interested in is maintaining a level that keeps up with inflation. If all you want is a 2%-3% annual return, there are many safe ways to accomplish that. So safe in fact, that many of them should be considered risk free.

Well that's the thing. It's difficult to project how much you will need. In the case of car insurance and homeowner's insurance, you know how much your car and home are worth. I know what amount I'd need to take care of my bills today, but with term life insurnace, I have no idea what I'm going to need 5, 10, or 20 years from now. What if 10 years from now we buy a bigger house that carries a bigger mortgage? What happens if 10 years from now I have two car payments instead of the current single car payment? What happens if 15 years from now Jack gets accepted at Harvard as opposed to the University of Maryland? These are unknowable at this point, and I'd need a freakin' ton of insurance if I wanted to cover myself for every conceivable situation.

Now, one could argue that if I move into a bigger house 10 years from now that I can just get a bigger life insurance policy then. It's true - I could do that - but the premium on the policy for someone who is 46 years old is much higher than someone who is 36 years old. Simply put, the older you are, the more likely you are to die during the covered period.

I'm just trying to be realistic in figuring out the worst case scenario and what I'd really need. I've never had insurance that was 10X my annual salary. My current policy was less than 10X my salary when I first took it out a few years ago, and since I'm making more today than I was then, it's quite a bit less now. My thinking at the time was that I probably wanted at least half a million. The question is how realistic would it be to need more than that? That's what I don't know. Do I need 3/4 of a million? A full million?

On the one hand, at 0.1% of policy I could get a full million for $1000 per year, which is significantly less than I pay for pretty much any other insurance, regardless of whether we're talking car, health, homeowners, etc. So I don't necessarily view that as cost prohibitive. On the other hand, I cannot see my family actually ever needing a million, so I don't see the sense in covering myself for that much. Plus, unlike health, car, and homeowners insurance, which chances are you'll use at some point, it's entirely possible - and indeed the hoped for result - that I won't use the life insurance at all over the term of coverage.

The issue is the amount needed is dependent on when I die. My wife would need a lot more if I died tomorrow (when she is the sole care provider of a small child) than if I died 15 years from now. So even though I cannot foresee needing a million, I'd rather overshoot than undershoot. So I'm bouncing around between 1/2 of a million (which I'm quite confident would be absolutely necessary), 3/4 of a million (which may be necessary), and a full million (which I don't think would be necessary, but hey, I'm an idiot, and I've certainly been wrong before).

FIIK - with the rate college tuitions are increasing Jack may need a few hundred thousand just to go to a good school for four years! And damn my insurance agent. I thought I had this taken care of, but he planted a seed that made me consider that I may need more than I have.

 

First, welcome to the boards!

And thank you for your advice. I did use an online service for my initial policy. I went to Accuquote specifically. They do the searching for you.

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EDIT: (dmc posted while I was posting)

Well, my wife doesn't work right now. She went back to work for 3 months, decided she liked being a stay at home mom much better, and will probably remain a stay at home mom for at least the next couple of years until Jack is ready to go to school.

That said, I assume if something major happened (like me dying) that she would return to work sooner than later.

 

One other item is as you have more money available, you need less insurance. Retirement funds will transfer to your wife upon death -- she can choose to cash them out into non-retirement accounts (there may or may not be a penalty -- you'd have to get an expert to discuss this). Your total funds need to be at a level to support your wife and kids, not just the insurance.

 

It pains me to say it, but Joa's thoughts on insurance companies are pretty accurate. I vividly remember my Dad talking to a company Claims Officer on the phone. The conversation went like this:

It worked, too, the bastards paid out. But not every client has an agent who will got to bat for him. That's why I recommend the opposite of Brian (welcome, btw, always nice to see a new face . . . or a new handle, anyhow!) and say you should get a real live agent who will stay with you AFTER the sale.

 

T2Bruno is on the right track here. You need to insure for your current financial situation. not the one you think you might be in 10 or 15 years time. By then, you should be working to have less debt and more assets, so although premiums would go up, you should need less insurance. Hopefully by the time you are getting past 55, you would very little life insurance at all if you've paid off your mortgage and your kids and wife can get jobs themselves.

 

... and the life insurance payments will shift to long-term care insurance.

 

Moar expert advice: whatever you eventually figure your outlay would need to be, double it.

 

Wow, that was kind of naive of all of us. It never dawned on me that people would Google keywords trying to find threads to shill in. I'm used to spambots just posting things that aren't relevant at all to the topic at hand.