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.
The Amount
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.
The Type
As discussed yesterday, there was no question: we were going to buy term life insurance.
The Term
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.
I don’t really know your financial situation, but I always error on the “conservative” side when pricing life insurance.
I like the longest term possible. Yes, it is cheaper if you go with a shorter term. And when you sit down with your graph paper and ruler to draw a straight line representing your future income/networth/savings into the future, it works out fine and dandy. But, reality will be far from that. I have a co-worker who’s husband just started a new job. Well, their spouse threw their back out getting out of bed the other morning, and it looks like her husband is going to get axed from the new job. Now, if she were to die today, they essentially have a toddler at home, a laid man who can’t work and probably not enough life insurance money for them to make it. Life throws curve balls at you. We can all assume nothing bad will happen to us, but time will tell if that is a bad assumption or not.
I also agree with the insurance agent, I don’t really consider employer insurance to be a significant part of my benefit. Plus, if you get sick and then find yourself unemployed, getting additional coverage can be problematic.
I buy what I need + a fudge factor for the longest term available. That doesn’t mean insure yourself for $5 mil and hope you die. But, make sure future uncertainties are taken care of.
So, accounting for a fudge factor, since I think I gave enough info to at least make a semi-educated judgment about my insurance needs (I don’t openly discuss net worth on this site but I will say it’s well past the 100k mark and I fully intend to continue it on a straight line — no, I’m not counting on exponential growth), I need to ask:
How much term life insurance do you think I should have?
Also terribly sorry to hear about your co-worker / her husband. I don’t mean this at all to be glib, but it shows the importance of maintaining appropriate disability coverage, too.
Fair enough. I can understand the anonymity online. I just assumed with your last post, you didn’t have a “fudge factor” in your calculation. I didn’t see it in your calculation section.
The point is, what if you spend another $120/yr or $240/yr ($10 and $20/month)? What do you get? a longer term? A little extra cushion? Seems relatively cheap for most people. And it provides a little extra security. But, we all get to decide for ourselves.
Another consideration, is in the US, just subtracting your net worth may not be the best idea if a lot of net worth is wrapped up in tax-advantaged accounts.
Disability insurance is complicated in the US. We have a post coming up on it. We’ve bought a private policy, mainly because being disabled isn’t as cut and dry as being dead and we didn’t like how our employer defined being disabled.
I guess for someone like me the employer life insurance isn’t a factor so I don’t have to worry about something like that happening. Yay for being uncomplicated! lol Twenty bucks a month for 20 years adds up but sure seems worth it. I suppose the comment above raises some questions about getting disability insurance. What are your thoughts on that Joe?
Disability is a more complicated matter, but still important. A lot of “good” jobs offer some kind of “Long Term Income Protection” — nevertheless, look into what your work offers. If nothing, look privately. Because of my wonderfully beneficial position of having it already, I don’t have the personal experience of actually buying it, so I’ll need to do some research. If anybody with knowledge and experience is reading this and is interested in a guest post, give me an email.
I would like to add that you should always disclose all past medical history about yourself if asked on the application form. If you fail to disclose something, the insurer may deny your benefit and refund your premiums.
Great point John. Honesty is the best ‘policy’.
Wow, your partner’s insurance was a lot cheaper… I guess that’s one point where I don’t fall into the age/gender-based statistics – I’m a high earner, but I’m female, not male.
Do you think that term life insurance really makes sense when one has no dependents or a mortgage? What if a person had a mortgage but had no dependents or partner?
By and large, it’d make no sense. From what I know about you, definitely not. Especially since you have 2x your salary through work.
There are exceptions. Let’s imagine a person is single, no dependents, and has a mortgage. He dies. The bank sells the condo. If it’s underwater, tough for the bank. But let’s say his wonderful Mom and Dad signed on his mortgage, so he could get a cheaper rate. Well, then his dear parents are on the line for the shortfall. If you are half of a business partnership and, in the event of your death, you don’t intend to simply give your partner your half of the business – your partner would need to buy it from your estate. So your corporation should take out life insurance on each of you, and you should sign an agreement that your shares will be bought from your estate automatically with the money in the event of your untimely demise. So as you can see, there are many many bizarre situations one could concoct where a dependentless cat lady would still need term life, but for the average single, dependentless person it’s not necessary.
And yes, I wish that “equality” applied to everything, including insurance lol
How did you go from single, no dependents male to crazy cat lady?!
I would say that insurance “equality” is not there due to statistics. Being female is definitely helping my insurance rates
Nothing to add really (honestly, I just recently started actually paying close attention to my finances (at 24)), just wanted to say that I really appreciate these posts! No dependents at the moment but I’m usually one of those crazy must-know-everything-and-plan-everything-before-doing-anything people so these articles feed into my knowledge-obsessed/control-freak neuroses. Thanks!
Aww thanks Kristin
I’m glad there are readers as OCD as me. It’s like a therapy group lol.
Blogging is TOTALLY a therapy group, haha.
I am in a similar situation to you (young family). Agree 100% on everything you’ve said, about the need to have life insurance, the simple term policy being the best, and the way some insurers will try to sell you on more than you might really need (although to some extent I would argue that folks that are less financially-savvy might actually need more, as they may find themselves in the future with higher debts, more costs, etc., that perhaps you or another “savvy” individual may not – so perhaps a higher amount could be construed as protecting yourself from your own potential future stupidity!)
A product I found was something called a “Joint First to Die” policy. I was unaware of this product when I began my search. Basically, both my wife and I sign one term policy, and once one of us dies, the policy pays out, in full, and is then finished. If you both die at the same time, you only get paid once. So for us, I was looking at something similar to you (ie roughly 500k coverage each). I could buy us each a 500k term policy, but instead, I found I could actually buy a $1mil “Joint FTD” policy actually for just a bit more money. So in the event we both die, the coverage is the same (2x500k vs. 1x1mil), or if only one of us died the payout is double. Conversely I could have compromised a bit and bought a Joint FTD for 500k or even 750k for less money (in which case you save on premiums, but are left with less in the event you both die). Seemed like a semi-reasonable compromise for me, and as our coverage needs were similar, it seemed to work. We got a combined Joint FTD policy for a 10yr term for roughly $50/mth.
That sounds like a great option! Thanks for sharing; I’ll add your note to my weekly summary.