Between closing on our new home and dealing with our new expenses, we’ve learned quite a bit over the past month. We’re now turning our attention to our insurance needs and considering increasing our life insurance coverage.
We’ve been feeling as if we don’t have enough life insurance given our new financial circumstances. We thought it would be prudent for both us of us to have adequate coverage in case of an unfortunate event.
Estimating our life insurance needs
The first step was deciding how much we actually need. We’re not looking for a huge amount of coverage, but we want to be able to take care of our obligations should one of use die. We basically asked ourselves:
- How much support would each of us need?
- How long will it take to get back on our feet?
Since the main obligation is our new mortgage, we decided to get enough coverage to pay off the balance of the mortgage, cover our final expenses, and create a bit of a buffer. We figure our emergency fund can also help cushion us during the difficult time if necessary.
Term vs. permanent life insurance
Once we decided on an amount, our next decision was whether to buy a term life or permanent life insurance policy. Each has its own pros and cons.
Term life insurance covers you for a specific time (typically 10-30 years) with guaranteed level premiums. If you die during that term, your beneficiary, such as your spouse and children, will get the full value of the policy. Some benefits of term life are:
- Cost: Term life premiums are cheaper than whole life insurance premiums because they don’t include an investment component.
- Ease: It’s a pretty clear policy: if you die within the term of the policy, your beneficiary receives the policy’s full value.
The biggest problem with term life insurance is that once the term is over, you’re no longer covered (unless you get a new policy). Also, while you can always “buy term and invest the rest, ” many people lack the discipline to do this.
Permanent life insurance (including whole life, universal life, and variable universal life) doesn’t have a set term. Rather, it covers you as long as you pay the premiums. Some benefits of whole life are:
- Cash value: Because a portion of your premium goes into an investment account, your policy accrues a cash value. In the long run, you can opt to have your premiums paid by this cash value, or to annuitize it as a source of income.
- Credit line: If you’re ever in serious need of cash, you can borrow against the cash value of your policy.
A major problem with permanent life insurance is that it is very expensive, at least at first. What good is a life insurance policy that you can barely? Permanent life policies can also be much more difficult to evaluate because of the complexities associated with the investment component.
After looking at both the numbers and our goals, we chose to go with a 30 year term life insurance policy. We chose 30 years to protect each other and cover the mortgage.
We used an online insurance comparison tool to get ballpark estimates of life insurance premiums for healthy individuals in their late 20s. We then looked at several life insurance companies to get specific rates. I also asked some friends and online buddies if they had any thoughts, problems, or good experiences with the companies they use.
We also contacted our local insurance company to see if they could offer a competitive rate on term life insurance. After checking around, we went with 30 year term life policy from our local agent with a face value of $150, 000. By opting for bi-annual payments, we also got a small discount on our premiums.
We now have a small health exam coming up and, assuming all goes well, we’ll be done (for now) with life insurance.
What do you think?
Do you have life insurance? If so, what type? And how did you decide how much coverage to buy? And how did you find your policy?