If you have kids or someone in your life who will need to be supported in the event of your untimely demise, you should have some life insurance. But how much is enough, and how can you make sure you’re getting the right rate? Here are some important facets that I recently had to consider.
When my husband and I had our first child, we went to talk to a life-insurance agent. Our agent suggested that term-life insurance would be the most affordable option for us. We were new parents, and therefore paranoid, so we covered my husband for $600,000 and me for $500,000. This would be enough to support us in a manner in which the survivor would like to become accustomed, while also saving enough for Babykins to head to an Ivy-League school in 2018. Good plan.
We learned that we would be paying more than the national average for our coverage: my husband had only recently quit smoking, and I was still heavily overweight from my pregnancy. So, note that you will only get the best rates if you’re as healthy as can be. Two years later, my husband was still off of cigarettes, and after a lab test proved it, his rates dropped.
Once we had our second child and were a little more blasé about the whole thing, we returned to our life-insurance agent. We felt that we were over-insured — our credit card debt was paid off, and the only other debt on our books was in the form of student loans, which terminate upon the death of the payee – and we wanted to see how we could drop our payments.
Peter Coy of BusinessWeek suggests that “ If you die, the death benefit to your survivors should be precisely large enough so they enjoy the same living standard as they did while you were alive.” Well, my spouse is finishing his PhD this semester, and hasn’t yet started living up to his true income potential, so we’re not living high-on-the-hog, yet. As such, it seemed to us that we could cut our coverage by $200k for him and $150k for me. As we were paying about $10 per month per $100,000, this would save us about $40/month, which calculates to $480/year, which pays for a lot of babysitters!
Additionally, life-insurance payouts are tax-free, which calculates to about $80,000 worth of insurance for every $100,000 of lost income.
We share childcare duties and have plenty of time to save for the children’s college fund, and we’re both intense workaholics, so this seemed like enough coverage to keep him or me afloat should the reaper strike one of us.
We are interested in whole-life insurance as an investment vehicle, but at this point, it’s still a bit out of our financial reach. One major benefit of whole-life insurance that I didn’t know is that it is not looked at as income when your college-bound children start filling out their FAFSAs. Thus, it’s a savings/investment vehicle that won’t count against your children’s chances for need-based scholarships. Tricky!
If you’ve already got life insurance through your job, you still might consider purchasing some through an independent agent. Why? Because if your job ends, so will your life-insurance policy. Check the fine print and don’t leave your dependents exposed to financial ruination in your afterlife.