Yesterday, in Part 1 of “Steps to Personal Finance Success #2 – Buy Term Life Insurance”, we discussed important considerations for purchasing life insurance. Today, in Part 2, I’ll discuss how I applied these to my situation. Please forgive me for talking loosely about my death or my partner’s death. God forbid. But let’s just speak frankly.
My partner and I have a disparity in incomes. Also, if I died in the next few years, she would lose certain benefits (until I have enough service accrued in my pension plan). Notably, however, if she died in the next few years, then I’d need to pay for a lot of child care in a very expensive city. I won’t bore you with the intricacies of the calculations, but our needs came out to about a half a million dollars in coverage for me, and about four hundred thousand in coverage for her.
As discussed yesterday, there was no question: we were going to buy term life insurance.
To establish the necessary term for the policy, I used the number of years that it’ll take for our first child to be an adult. Since we’re already actively growing our net worth, by the time our daughter is 18, we will have no need for insurance to cover any liabilities (especially if we continue our ‘no debt’ policy), future income needs, or final disposition expenses. We therefore each got a twenty year term policy, because it will cover us until my first daughter is 19 years old.
How the Buy Went Down
Through my work, I already have $70,000 in free coverage. When my daughter is born, I can get an additional $200,000 in coverage for myself for under $11 a month. That means that I needed to buy at least $230,000 in additional coverage. My partner needed to purchase 100% of her coverage.
We started by getting quotes on Kanetix.ca and then calling individual insurance companies that offered reasonable rates.
Interestingly, insurance companies will usually insist on doing a “needs analysis” for you. The outcome of this analysis is that you’ll probably “need” more insurance. Much more.
For example, the insurance advisor pointed out that my $70,000 worth of ‘free’ coverage through work would, if I were laid off, be cancelled automatically. I pointed out that I’d have 6 months of continued coverage, during which time I could find affordable term insurance to “top up” my coverage. If I bought extra term insurance now, it’d just be a waste. I was told that I “need” about $1 million worth of coverage. Yes, maybe if I had debt and five kids. His estimate was, for me, a complete fabrication. In the event of an untimely death, I have access to a free burial plot and I’m sure my Mom would step up to help out with other costs (on a budget, in keeping with my wishes). Half a million dollars will do my partner and daughter just fine.
In the end, I got a $250,000 policy for $20 a month. This means that I currently have $320,000 in coverage and, as soon as my daughter is in the world, I’ll top up to $520,000 at a low rate. My partner was able to secure a quote for $500,000 in coverage for $18.50 a month (must be nice to be a female…)
$20 / month ($250,000 term policy)
$0 / month ($70,000 policy through work)
$11 / month ($200,000 policy through work)
= $31 a month for me
+ $18.50 / month ($500,000 term policy)
= $49.50 / month
If either of us passed away, the surviving partner would have $500,000.00 to live on and take care of the kid(s). Coupled with our net worth, this lump sum would result in a very comfortable lifestyle for my partner or I and our child(ren). The surviving partner could easily buy a modest home (outside of Toronto and after the housing bubble ends) plus have a large chunk of money left over. Even if the surviving partner couldn’t obtain gainful employment for a period of time, living expenses would be safely covered.
Total cost per month? $49.50
Yes, under $50 a month for peace of mind. If you don’t have it, go get term life insurance today.