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Adjusting Our Life Insurance Coverage

Written by Laura Martinez - 6 Comments

About a year and a half ago, I wrote about how we decided on our life insurance needs. Recently, Neal mentioned that he has re-evaluated his own life insurance needs, and now we’re thinking about modifying our coverage as our circumstances have changed.

The fact that we’re expecting a baby this summer has encouraged us to take another look at our finances. This includes re-examining our life insurance coverage.

Analyze your financial needs carefully

Here are some questions you have to tackle in order to figure out how much life insurance you need.

  • How much will your funeral cost?
  • How much support will your dependents need?
  • How long will they need this level of support?
  • Do you have any one-time obligations, such as a mortgage payoff?

These are the same questions that we faced a year and a half ago, but some of the answers have changed. For example, with a child in the equation, we’ll definitely need dependent support.

The rule of thumb we’ve found is to multiply the deceased spouse’s income by 10 to get a ballpark estimate of necessary coverage, which would definitely require an increase in our coverage. As of right now, we really only have enough to pay off our mortgage and student loan debt with our term life insurance policy.

Listing our debts and final expenses

My husband and I both agree that, at a minimum, our life insurance coverage needs to be enough to pay off all of our existing debts and take care of our final expenses. We believe that being debt free will be a huge relief to the surviving members of the family. Right now our two debts are:

  • Student loan: $21,000
  • Mortgage: $112, 000

That gives us a total of $133,000 of debt that we would like to pay off. For funeral costs, we’re going higher than average and estimating $15,000. That means the absolute minimum that our life insurance policy should cover is $148,000. Our current coverage will address these basics, but there’s noting left over for ongoing support.

Figuring out how much support we’ll need

Once we’ve taken care of our remaining debts, our next topic to discuss was how much support we’d like to leave behind to the survivors. Instead of just factoring 10x the lost income of one of us, we’re looking at enough to cover about three years of lost income. That would give us a financial buffer so the grieving spouse can decide how to handle day-to-day expenses. Once our debts are paid off, that three years of income would go much further, hopefully further reducing the stress.

With one remaining spouse, another item that we need to consider is childcare expenses. While family and friends will no doubt help out as best they can, we can’t expect them to do so forever. We’ll thus need to have a system in place to help with the transition. Looking at childcare expenses in our area, we’ve estimated that we’ll need around $1,000/month. We’re including enough in our insurance to cover three years of childcare. Whatever we don’t use can be redirected to other expenses or possible savings for future use.

Shopping around for life insurance quotes

Once we knew roughly how much insurance we’d need, our next step was to start shopping around for policies. I actually do this on an annual basis – every time we get a payment notice, I take a quick look around to see if we can get a better deal. While you can hit a bunch of individual company websites, it’s far easier to get life insurance quotes from an aggregator, such as Insure.com.

By shopping around with multiple companies, you can get a sense for typical prices and make sure you’re getting the best deal. You should also be sure to check out our tips for saving money on life insurance.

Our decision

After running the numbers, we’ve decided to hold off a bit and continue shopping around before increasing our life insurance coverage. Next week, I’ll be contacting our current insurance agent and seeing if they can offer a competitive quote for the amount of coverage we’re looking for. If they can, even if it’s a few dollars more, we’ll probably stay with our current company. However, if we can find a substantially better deal with another reputable company, we’ll go ahead and make the switch.

We sincerely hope we won’t have to use this life insurance policy in the future, but having it will give us peace of mind that our family will be financially taken care of if anything happens to one of us.

Your thoughts on life insurance coverage

I know that many of you have thought about this long and hard about your life insurance coverage, so I’d love to hear your thoughts on the topic. Do you have a life insurance policy in place? Why or why not? If you do, what kind of policy did you get, and how much coverage did you sign up for? How did you determine the right amount for your family? And have you changed your coverage level over the life of your policy?

Published on March 29th, 2011 - 6 Comments
Filed under: Insurance

About the author: helps families achieve financial freedom by sharing tips for reducing debt and building freelance income over at Couple Money.

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6 Responses to “Adjusting Our Life Insurance Coverage”

  1. 1
    Evan Says:

    You may not need to worry quite so much about student loan debt. If the borrower dies it is discharged.

    See: http://www2.ed.gov/offices/OSF.....harge.html

  2. 2
    AndrewL Says:

    It is my understanding that the older you get, the more expensive Life insurance gets. If you buy life insurance at a younger age, you can lock into lower premiums, so it would not be beneficial to shop around for new term policies every year.

    I just purchased 2 policies, a term policy and whole life policy to lock in lower premiums rather than wait until we expect our first child and then have to pay larger premiums due to older age.

    also, this article was kind of scary: http://www.bloomberg.com/news/.....efits.html

  3. 3
    Tom Says:

    So, not only will the student loan be discharged, but if you’re paying off your mortgage, your annual expenses will drop too. Maybe you can handle the cost of childcare if you aren’t paying a monthly mortgage.

  4. 4
    First Step Says:

    Daycare costs will decrease as your child gets older. However, many parents underestimate the amount of time required to transport middle- and high-school-aged children to and from lessons, sports and other activities, as well as the money required to participate. You may need to pay a nanny or other caregiver to drive your children around until they can drive themselves. I have two daughters who are Girl Scouts, take yoga and piano lessons, play volleyball, sing in chorus, participate in plays/musicals and volunteer. We are able to carpool with other families for some activities, but not all. I would hate for my girls to have to give up activities they love because I’m not here to drive them, and my husband is working.

    Currently, I have a flexible, part-time job, which allows me to do some work at home. Having an extra buffer of money may allow for part-time or more flexible work arrangements during the busy years. We increased my husband’s coverage several years ago by an additional 5 years of salary so I could continue to work part-time until the girls are in college, if something happened to him.

    We left my coverage at ~$300K. It would still cover our mortgage (no other debt), pay for my funeral (donating my body to Duke Univ. Med School, only cost would be for memorial service), leave some money for college and provide money to hire a college student to shuttle the kids around until my older daughter can drive in less than 2 years. By not having to make a monthly mortgage payment, my husband would be able to cover the remaining college costs from his current income.

    Just another perspective from someone about 15 years ahead of you in the parenting department.

  5. 5
    Mike Says:

    I would warn against solely shopping online because just like most things, price isn’t everything…

    Some companies will be cheaper because their policies aren’t convertible. Some will have extremely strict underwriting and you will never qualify for the best rates and their are many other variables.

    I’m a life insurance agent and their are several companies I represent that are always at the top of the list for “cheapest” prices, but they are just awful to deal with. Underwriting can take twice as long. People end up with worse rates than other companies and on and on.

    I would recommend finding an independent agent, or two, and asking them for a recommendation. You will get better service and most likely a better rate. Also a good agent will be your advocate in getting you the best price with a particular carrier.

  6. 6
    Fia Velasco Says:

    Term is a waste of money! (If you can save $50/month, you should buy Permanent, preferably Index Universal Life or Global Universal Life). But of course if you don’t have much money then Term is the way to go, but if you are buying Term you should go with a Company that allows you to convert to Permanent IUL/GIUL, when you can afford it. Did your agent tell you (all who bought Term) that after the Term, it is renewable but it will be a lot expensive – not 2x, 3x, or 10x expensive! It would be around 100x more expensive (If your agent showed you the illustration). There is only 2 kinds of insurance Term and Permanent. Think of Term as renting a house and Permanent as buying a house. Term doesn’t have and will never have equity. Term vs. Permanent: Term 1)Low cost (initially), 2)Cost goes up, 3)No equity, 4)Coverage ends / Permanent 1)Higher cost (initially), 2)Cost remains level, 3) Builds equity, 4)Coverage never ends. As for Whole Life (you’ll be paying premium the whole of your life, da!) Now, Index Universal Life/or Global Index Universal Life is a different story. I got the Index Universal life when I was in my 40s and paying $282.00/month but not all that goes to the cost of insurance, it goes to my cash value part of the insurance earning 6%-12% interest

    I used to work with a bank as a teller but now I changed career, still in the financial industry. I am learning a lot with this new career and I don’t have to go and spend so much on education. This career showed me how to really really save money (like the rich and very rich who have/retain/hire financial advisors – I don’t have to get one now because I’m doing it now), showed me the tools/vehicle where I can put my money to fight the 2 biggest enemy of money – inflation and taxation. I wish I knew this company when I first came here to America at age 19.

    No one enjoys buying life insurance. Why should they? Who likes spending their own money today for someone else to receive a payoff after they are six feet under? I believe most people, even the responsible ones who willingly purchase this valuable protection for their families, see life insurance as simply a necessary evil. You might ask yourself, why do people feel this way about life insurance? The answer is simple. All the focus has been on the benefits provided to the family upon death. However wonderful those death benefits may be, the benefits that life insurance provides during a person’s lifetime are exponentially more exciting. Most financial planners and insurance agents are not fully aware of the power of the LIVING benefits available.

    Even if you saved a good chunk in your retirement (i.e., 401K, Roth IRA, etc.) that money in your retirement accounts is not yours alone? You have a 50% or more partner – Uncle Sam. People are living longer, when you’re 50, 60, 70, 80 years old, you would have wished that you bought permanent life vs. term.

    I told my daughter that as soon as you turn 18 you have to buy Index Universal Life (the BEST in Permanent Life Insurance, now at 20, she has another one Global Index Universal Life), because it will be cheaper, even if she doesn’t have a family of her own yet. In 20…30 years she could have a million or more in her cash value part of her insurance, specially if she overfunds it (meaning, puts more money than the premium amount). And what is good about this insurance is she can utilize the LIVING benefit feature (structured properly), meaning, she can get all the money she put in TAX-FREE! (and she doesn’t have to die)! She will be able to live all of her retirement years without Uncle Sam seeing one red cent of her hard-earned money. Tax-free dollars while you’re living and tax-free dollars distributed to whomever you choose upon your death. What she is doing is not for everybody. Though it is open to everybody who can qualify for life insurance. It is best suited for 1) those who currently are contributing to a tax-qualified plan such as 401K, SEP, Simple IRA, etc., 2) those who earn relatively large income (doctors, lawyers, etc. who won’t qualify for a Roth IRA), or 3) those who want to save (people making average income) more than a few thousand dollars a year in a tax-free environment. If you are putting money in a bank for your long-term saving…you are losing out (inflation and taxation). Everyone should think like a bank. You put money in your bank account, bank gives you less than 1% or 3-5%(let’s say bank is generous), inflation is around 3%, then you have to pay tax every year on the interest. The bank, meanwhile leverages/uses your money to earn 8%-13% or more…you see where I am going????

    Going online to compare prices is not really a good idea. If you can find a non-captive agent, meaning not working for 1 company only then that is better. That agent can offer you what is best for you because the agent can show you different products of different companies that best fit your needs. Talking to that agent face to face is much better. Just like what I and my daughter did. If you live in New Jersey, I can refer you to the agent that my daughter and I talked to. If another state, I can still refer you. That company is all over US, Canada, Europe, Asia. If you want to know more email me.

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