How Much Is YOUR Life Worth?
Kyle and I had one of our rare money disagreements last week. The (temporary) conclusion is that we need more information before making a decision, which is where you come in!
We decided that it’s high time we bought life insurance as I’m rather financially dependent on Kyle while I’m growing my business. We also want to have kids in the next couple years, at which point life insurance will go from being a good idea to a necessity. So we’re at least going to decide on the amount of life insurance we want to have once kids are in the picture, even if we don’t buy all of it now.
While I haven’t done a lot of targeted research yet, my passive learning on this topic through my involvement in the PF blogosphere has left me with the following first impressions:
- we will buy term life insurance (probably 30 years) to take us through raising children and paying off a home and basically to the point that we are financially independent
- 10 times yearly income for each person is okay, but more would be better
- ‘overbuying’ early on might be a good idea as prices might rise by the time you really need more
- life insurance price does not scale with the amount of the death benefit, i.e., it’s not that expensive to add to the benefit above a certain baseline
My initial idea was to buy a lot of insurance right now, like 10-20 times yearly income for each of us, and then not have to re-evaluate for 5 or 10 years. But when I actually started gathering quotes, I realized that 1) a higher-than-needed amount of coverage was a pretty big monthly expense (looks like $200-300 for both of us – doable but not pleasant) and 2) the price scales nearly linearly with death benefit (i.e., $2M of death benefit is close to twice as expensive as $1M).
Even before I brought this data into my discussion with Kyle, he objected to the idea of buying 10+ times yearly salary of coverage. Basically, I was thinking of insurance as a way to (nearly) replace the dead spouse’s income to the family, while Kyle was thinking of it as getting-back-on-your feet money that would only last a few years until the surviving family adjusted. When I tried to point him to independent sources or suggest that we should see a financial planner, he said that any sources from within the financial industry (even those not directly selling insurance) were biased toward overbuying. (Can you tell I married a confirmed skeptic? 😉 )
I’m confident that with some additional research we’ll be able to reconcile our views and also calculate the amount of insurance we want to buy. But before we jump into that process, I want to hear from you about how much life insurance you own (if any), how you calculated that amount, and how the amount you own has changed over time (if it has).
Why do you or do you not currently own life insurance? How did you determine the amount of insurance to buy? How has your coverage level changed as your life has evolved?
photo by Flickr user Simon Powell and used under CC by 2.0.
Filed under: insurance · Tags: life insurance
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This is something we’ve had to think about recently as we found out that my immigration status makes this whole mortgage/title/finances thing a bit more difficult.
We’re normally quite good about these conversations but this took a turn for the hyperbolic:
Me: I couldn’t afford to stay here if something happened to you, between daycare costs, etc.
Husband: So you’d have to sell the house
Me: What? You’d want me to deal with your death, financially trying to stay afloat, working and caring for a child who just lost its father!
Husband: Well…
Me: You’d like your grieving wife, your (unborn) child and your cat to be homeless on the street!
It’s on the post-PhD / pre-baby list of things to consider at the moment since clearly that wasn’t how that conversation was supposed to go.
Haha, our conversation sounded fairly similar to that one! I mean, we were joking around, but… kind of, yeah. Your situation does have an added wrinkle with the immigration. Maybe it’s worth consulting a professional lawyer/estate planner?
We’re with Kyle on this one and view life insurance as “recovery” money rather than “replacement” money. For that reason, we’ve never taken out policies beyond what our employers cover at no cost to us, which have been in the range of 2-3x salaries. But we’re also DINKs who intentionally keep our combined spending below what either of us earns, which we tend to think is an even better type of insurance than a term policy.
I’m glad to hear that you don’t think Kyle’s out in left field! I don’t think his employer offers any life insurance – I’ll have to double-check that – and of course “mine” doesn’t either.
I agree with the sentiment that being financially independent from one another and in a very financially healthy spot makes a (large) policy kind of moot. Our incomes are so unequal now though that I’m concerned. Can the surviving spouse in your marriage handles your mortgages alone, or what’s the plan for that?
You can also get a policy on his life and only add yours after you have kids since he will only need replacement income for replacing a second parent, not your job. Or just a funeral insurance policy, but those are so small the emergency fund could handle it.
Yep, agreed!
Double check the employer provided insurance – it’s a pretty common benefit to provide at least *some* coverage. I think the lowest we had with any salaried position was 1x salary. Besides, having seen the numbers from the employers side of the equation, you wouldn’t believe how cheap it is for them to provide it instead of for you to buy it on the open market. Also his employer might provide some spousal coverage. Mine covers $10K for spouse and children (basically funeral benefits) with the option to buy more if you want it, although those rates aren’t quite as low as what the employer pays.
When our incomes were unequal (and significantly lower since Mr PoP was working for minimum wage when we first married), we didn’t worry about a life insurance policy then either. The benefit through my work would have always covered the mortgage and in all likelihood if I died he would have sold the house. As it stands today, our mortgage is our only liability and it’s less than 1x either of our base salaries… so if either of us dies work insurance would pay the mortgage and then leave the survivor with either 1 or 2 years of the salary of the one that died. That would be more than enough to get through recovery and figure out next steps.
I did ask Kyle about it and he’s pretty sure there isn’t any life or disability insurance offered through his company, though we’re going to look through the (little) documentation we have on his benefits again and maybe ask the founder who arranged for the benefits. I realize it’s a common benefit – he actually had one year for free from his postdoc – but start-ups have notoriously poor benefits. :/
Sounds like your mortgage is really not complicating the situation!
As you two are financially prudent individuals, I agree with Kyle–I could only imagine needing maybe 2-3 times the annual salary to at least help get over the initial loss. If that could shave your payment in half, it makes much more sense. Life insurance premiums are untaxed, so that’s a large sum of money at once.
I get the paranoia about needing someone to fulfill the loss of salary, but at the same time, if you don’t have serious debt and you live modestly (and even if you own a house with a mortgage, it’s a modest mortgage payment), you don’t need $1 million dollars.
A lot of the “experts” on the idea of life insurance are assuming that most people don’t live well within their income (like able to live under 50% of take-home pay).
IMHO, it’s a waste of money to pay extra on a life insurance premium for extra money you probably wouldn’t need in the first place. If you could put that saved money from an over-priced premium in retirement accounts, I think it’d be a better place to spend the money.
FYIW, I have the 1.5 year premium through my job only and my husband has an equivalent of 5 times his salary (he’s not making big bucks but we did buy a separate policy for him) but that’s enough for both of us. We only got a 10 year policy for my husband initially to keep costs down as we knew once we started having kids, we’d switch to a 20 year term (which is something we want to do soon as I’m pregnant). We will pay more for longer term, but we’re at a point now where we can keep the same payout amount as that is still enough money for us. I might try to supplement my policy with a lower dollar amount to even things out for both of us.
Also, keep in mind that life insurance is unnecessary after your kids are out of the house in my opinion. I knew a girl who’s dad died in high school and he had one of those $1M+ policies and she ended up with a brand-new Lexus for her first car. While it’s good to be able to take care of kids for a few years, sometimes too much money isn’t a good thing.
Yeah, I think it’s a balance. Enough to pay off the mortgage, cover any career breaks and fund the kid’s education – not make you massively well off. All our expenses are just about manageable on one salary but in the event of a tragedy, your expenses would likely increase – juggling school pickup may be managed with 2 parents, a nanny might be necessary with just one.
I’m a worst-case scenario planner though – I told my husband that if something happened to him, I’d move back to my home country but I’d have to wait for the cat to pass as well (didn’t want him to put him through the immigration / quarantine process). I think I believe if I plan it in great enough detail, it can’t happen.
Thanks for sharing your thoughts! I’m really happy to see how other people are handling this decision.
We don’t save anywhere near 50% of our income so we’re not living as far below our means as many of our PF blogosphere counterparts, though we’re certainly doing better than the average American. Like with emergency funds, I do agree that it makes more sense to calculate off of expenses rather than income.
Yeah, if we can find a couple hundred bucks a month to put toward life insurance, it sure would be nice to be saving some of that instead…
The more I’m thinking about it the more it makes sense to buy only what we need when we need it, like don’t worry about paying down/off a mortgage until we have one!
Yeah, I figured we would buy a 25 or 30 year policy to see our (future) children through college, then cancel if we’re within striking distance of FI. Is that a better plan, or buying a shorter term and then adding a few years when the timeline is better worked out? I really hope we’ll teach our children well enough that they won’t make the same choices your friend did if they were in that situation!
Not that I have life insurance (single, no kids), so I’m just armchairing it here, but here’s my opinion.
I’m with Kyle. Guaranteeing yourself to spending a bunch of money to replace the dead spouse’s income vs the chance of that happening just doesn’t seem favorable. Getting a policy to have get back on your feet money is more sensible. Besides, both of you earned PhDs. You didn’t get them by just sitting on your butt and refusing to deal with hard times. I’m sure you guys can get through whatever life throws at you.
Furthermore, not only are insurance agents trying to sell you expensive policies for their benefit, they’re also trying to market to the average customer. Clearly you guys are much better at handling your finances than the average customer.
And finally, I would probably just get rid of life insurance at some point and self insure. You guys do save a lot of money, and once it reaches some critical mass, you just don’t need life insurance anymore.
Oh yeah and I think people like yourselves who have demonstrated their willingness to figure out financial things for themselves will almost never get their money’s worth out of a financial planner. Not unless they have literally way more money than they know what to do with, and they’re just trying to find tax loopholes.
But if you still think you want a financial planner, then find one who will sign a fiduciary pledge.
Thanks for the pep talk!
You are right that we’re not the average Americans, either for job market-ability or financial management. We have a nice nest egg going already so we don’t need insurance money to become FI immediately.
I agree about self-insuring at some point, but I think that point is going to be after our (future) kids are no longer dependents, and I don’t really have a timeline on that!
That’s the reason we haven’t seen a financial planner yet… What questions do we have that are worth someone else answering for a hefty price tag? Meh. But yes, we would probably just hire a fee-only financial planner for a few hours/a once-over of our situation.
I haven’t had life insurance because I don’t feel the need of having it as I am not yet a family man. My parents do have life insurance. Maybe I’d consider getting it when I am married. In 2 years time, I’d probably have. What life insurance do you think I should get first?
Term is supposed to be the best choice for the vast majority of people!
We did what you’re suggesting but now that I know more I agree with Kyle. Your income now is only relevant in terms of what you can afford. Expenses are what matters.
Honestly, before you have kids you should get pretty small life insurance policies. After kids, think what you will need to get through an unexpected parent death. Also Kyle should get disability through his work if offered.
Thanks for adding your $0.02! Did you downgrade/cancel some of the insurance you initially bought? Thanks for the reminder about disability, too!
No, by the time I figured all this out, the $530/year that we pay for DH and $560/year for me (note: if you are breastfeeding, your cholesterol will be higher and you should dispute the higher charge on that basis– I didn’t and $30/year is not worth it to me to do it now) just isn’t a big enough of a deal, especially since 9 years have passed and we don’t know what the cost of the new plan would be given that we’ve aged.
If I die, the payout would mean that DH could buy a house in Paradise with at least 40% down since the only thing keeping us in the small town we live in is my job. If he dies, I might need the payout for psychiatric care! Or who knows.
Both policies are term and will end when our youngest is out of college (with a couple years to spare since we weren’t sure exactly when DC2 would be born when we got the policy).
Oh, and I should add that we do want our kids to be very well off if both parents die so that they won’t be a drain on whoever takes them in (my BIL’s family, according to our will, with my sister as trustee until they are of age).
That’s a further good point for when kids are in the picture… Will there be enough insurance between the two of us to provide for them until at least the age of majority?
That is a good strategy, Emily. I am also considering to buy a term life insurance and it is really a must for every household to have. Thanks for sharing your strategy Emily and it’s definitely worth having.
I went back and checked my comment on your last post on life insurance. At my old employer, I had to have at least 2x my annual base pay in life insurance – I couldn’t opt out of it. That was the default at my now employer, but I was able to reduce it to $50,000. I have no dependents. The people who would inherit my estate at this time don’t need the money and could cover my funeral expenses with their own money and then reimburse themselves with my estate when they’re done processing that. I honestly don’t foresee a world in which I will ever end up taking out life insurance unless we have kids some day. I’m on the MMM side of “self-insuring” for life insurance. I understand that’s not a good idea for everybody though.
I would probably take out a policy on you for one year’s expenses (grieving period) + funeral expenses since your income is lower. And then for Kyle, my big question here is that even though Kyle’s income is much higher than yours, what would you do if something happened to him? How would that impact your income? Would you keep working on your business? Or would you take a more “normal” salaried job? I would take out funeral expenses + a grieving period on him as well, so somewhere around a $100k 30 year term for each of you. Then re-evaluate when you buy a house or have kids. Definitely double check if he has a small policy through work!
Great questions! I realize now that I was taking the 10x+ income for life insurance as the touchstone but that’s really most appropriate for a stay-at-home-parent who wouldn’t re-enter the workforce in a significant way. If Kyle died today I would, after a bit of time and a move, get a full-time job and keep my self-employment pursuits as side projects. So that does fit better with Kyle’s scenario of just having life insurance to provide transition money.
What’s the difference (in MMM terms, I guess) between self-insuring and reaching financial independence?
Well you can self-insure for life insurance before reaching financial independence. If we were married and my partner was to inherit my assets (which is not the case, but I’m making a hypothetical here), he would inherit a decent chunk right now, without me having any life insurance, including a place to live (that is mostly paid off, but that he could then pay off if he wanted to), a used five year old car, my 401(k), Roth IRA, and other investments, plus his own assets and his six figure job / easy to acquire another six figure job. We’re not financially independent yet at our current spending nor would either person’s assets cause the other person to be financially independent, but that windfall would still be plenty for him to not need any life insurance on me.
Conclusion: The difference between self-insuring and reaching financial independence is that if you’re far enough along on your financial independence journey, you can self-insure for life insurance. You don’t have to be fully FI to self-insure. Disability insurance is more useful until you reach FI.
Hmmm OK thanks for this response. I wasn’t really thinking of our current assets as being ‘inheritable’ upon one of our deaths because they already have joint purposes that wouldn’t change much.
That’s fair, but also to consider is that then your existing assets would be just to satisfy one person, not two. I know people who were close to early retiring (in their 50s) when one person unfortunately passed away, thus leaving the remaining spouse with more than plenty to live off of for the rest of their life, since their retirement planning was for two people. That doesn’t apply so much to you guys right now though, but it could be applicable in the future. In your case at the moment, the surviving spouse may consider downsizing in apartment or finding a roommate, before kids.
Bah, I hate thinking about death this much!
Yeah, for now we’re just throwing what we can into retirement without a well-defined goal, and if I died I’d rather Kyle just be able to retire earlier than use ‘my’ part of the money now. Similar story with our cash savings/taxable investments/future house down payment. Although I guess a bonus for keeping my student loans around is that they would be forgiven if I die and Kyle would have an extra $10k-ish!
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