can someone explain life insurance to me?

[Deleted]

My husband and I do not currently have life insurance, but we do have some credit card debt and a couple of kids. From reading these boards, I now know we each want a 30 year term policy worth 10x our income. Right? But I’m having a hard time figuring out why this is what we need. Of course, our agent is telling me we want whole life policies because they accrue interest, but all you knowledgeable YMer’s seem to disagree and say whole life is a scam. My husband and I will both be turning 28 soon – if we go for a 30 year term policy, what happens when we turn 58? Do we no longer have or need life insurance? By that time, our youngest will be 31, we won’t have any debt (YM has changed my irresponsible ways! ;D) and I’ll be two years away from retiring and collecting my pension. So before I call up our agent and tell him what we want, help me understand why I want it.

Normally, I’d ask my father his advice, but when I brought up the subject, he thought a $300k policy was ludicrous and that we should both just get a simple $5k policy like he has.

[thyme4change]

When your term life expires, correct, you have nothing - but you should have adequate savings and investing. I, personally, have insurance where the term expires when my kids are in their early 20's. Granted I started later than you, so I will be older - therefore it is more expensive.

What I might consider for you is a 20 year term worth 5x your salaries, plus a 30 year term worth 2 x your salary. That way, your kids will be well covered if something happens to them when they are being raised, and when they are in their 20's they shouldn't be depending on you, so the 2x just gets the other spouse through the rough patch.

[8 Bit WWBG]

I like what my agent said: "its not intended to make you poor, or your heirs wealthy".

There are several ways to go about procuring insurance, depending on what your life plan is. If you believe that within 30 years, you will no longer need insurance, then a term policy is the best way to go in the event of premature demise.

I purchased a spirit universal policy. It is in force until my 120th birthday, but it is not a "whole life" policy, nor does it cost what a whole policy costs. For me, that was the best option because I am uncertain as to whether I will be where I want to be financially in 30 years. My DF and I are not sure if we will have children, so right now we are only looking out for each other.

Its great that you are 28 (that is when I got my policy too) because the rates go up once you hit age 30. If you have any bad habits (smoking, drinking, overweight) try to ditch those before you get the policy.

...:::"but when I brought up the subject, he thought a $300k policy was ludicrous and that we should both just get a simple $5k policy like he has":::...

I have a $300k policy. I wondered what would happen if I croak in 29 years. $300k seems like a lot of money now. In 2028, that might barely cover a family of 3 for a year.

[luvmyrav4]

You might also be able to do a term conversion. After your policy has been inforce for 5 or more yrs you can usually buy more coverage or extend the yrs. Your needs might have changed and $300k might not be sufficient anymore. Doing a term conversion can be beneficial because a lot of times the underwriting is waived.

[shanendoah]

Through my job (I know, I know, but it works for us right now) I have over $300k of insurance on me and $50k on DH. We don't have any kids. I have so much on me because I am currently the sole earner in our family. If something were to happen to me, this amount would pays the bills for DH for 3 years while he finishes school or pay off the mortgage plus some.

[Deleted]

Jan 6, 2011 14:47:06 GMT -5 @vsnizzle said:

I now know we each want a 30 year term policy worth 10x our income. Right?

I have always wondered if this were true. It sounds like a number that the life insurance industry came up with to sell insurance. Kind of like the diamond industry and an engagement ring should cost 3 months salary.

As for the insurance policy being worth less near the end of the policy, I'd think that will be offset by the years other asset growth.

[so1970]

since im theonly wage earner in our family im insured heavily so my wife will not be in a bind should i die. she on the otherhand has enough to cover burial expenses so i dont have to worry about them. each case could be different.

[thyme4change]

I think if you have a high earning spouse and a SAH-spouse that would most likely never be a high earner (or even a working spouse in a low-paid industry) 10x makes sense. We don't have anywhere near 10x, because either of us could manage a decent life on our own earning power alone. We have enough to not have to make any lifestyle changes for a couple years, and cover college for the kids. It might also leave some extra savings to help the remaining spouse get to retirement.

[phil5185]

The purpose of life insurance is for the benefit of your depend ants. Yours will be no longer be minors, will not be 'depend ants in 30 yrs.

It should be called 'income' insurance, it provides your income for your depend ants if you are gone. And when you retire, you will no longer have a salary to protect - so, no need for insurance.

We can celled our insurance shortly after retirement 12 yrs ago. Today, a $750k to $1,000,000 policy should should provide enough interest income to support a family until the kids are thru college, and the surviving spouse is able to re-enter the work force.

[dancinmama]

I can explain it. You pay money and when you die someone gets money.

[Deleted]

Thanks everyone. I'm still going to give this more thought before I commit. We're both healthy with no bad habits (at least, none that are health related ) and I didn't realize that rates went up after you turn 30. So we'll get moving on this. I think we'll do a 20 or 30 year term, but I might rethink the 10x income... I'm not looking to make my husband or kids rich, but I want to make sure they aren't struggling if someone plows me over on the interstate during my daily commute.

Thanks for all your advice!

[Regis]

If you've been tracking your income/expenses, assume that you're dead and project what income and expenses there will be afterwards for your spouse over a 20 or 30 year timeframe. The difference between the two is what you'll need to cover by insurance. Then do the same assuming your spouse dies because you'll have different policy amounts for each of you. Seven to ten times income is a good estimate but, as with everything else, the answer is completely dependent on your individual situation.

Regarding the term/whole life issue, I'd stick with term. In my opinion, whole life is basically a savings plan for those who can't do it themselves. If you follow the advice of many on this board, you're well on your way to doing it without the whole life policy. I like to keep my insurance with an insurance company and my finances with a financial company without mixing the two.

And hopefully at some point you're going to realize that the surviving spouse can make it through retirement without needing any proceeds from the life insurance policy. That's when you no longer need it. If it's at the end of the term, great. If not, you'll need to get another policy.

Regardless, figure out what you need and make sure your agent gets you what you want, not the other way around.

[phil5185]

and I didn't realize that rates went up after you turn 30.

That's not exactly correct - rates go up with age, but monthly. Eg, the rate for a 24'6 is higher than the rates for a 23 yr old, the rates for a 32 yr-old are higher than for a 31 yr-old - and so on.

Term rates are currently historically low - for a $1M 30 yr term policy the rate is roughly $20/m at your ages.

[HoneyBBQ]

Whole life isn't necessarily a scam. It CAN be, but for some people/households it is a good vehicle.

That said, I think the 10x your salary is a very antiquated way of looking at it - especially if you live in a dual income household.

The way you should think about it is - if my spouse died, what would I need to continue my life?
For me, I'd want the mortgage paid off - because although I can pay for it on my income alone, it would be a big burden.
I'd also probably want 1-2x his salary to provide for his children in the future (one is over 18, one is almost 18).

So for me, I'd want around 4x his salary in insurance.

Now, if you have children, you have to play it two ways - one - if you die and your spouse is left to pay for everything alone, and two, if you BOTH die, what does the guardian of your children need to get them through life?

[kinetickid]

Jan 6, 2011 14:47:06 GMT -5 @vsnizzle said:

Normally, I’d ask my father his advice, but when I brought up the subject, he thought a $300k policy was ludicrous and that we should both just get a simple $5k policy like he has.

I have one of those cheap-o policies for my father. In his case, he has no debt nor any dependents, so he doesn't need any insurance. Also, he's HORRIBLE with his money, so there's no way he'll have even enough cash in the bank to cover funeral expenses should he die. So we got a $10,000 AARP policy to cover funeral expenses. If he dies within the next 6 years, we come out ahead.

[Deleted]

Jan 7, 2011 11:55:29 GMT -5 @kinetickid said:

Jan 6, 2011 14:47:06 GMT -5 @vsnizzle said:

Normally, I’d ask my father his advice, but when I brought up the subject, he thought a $300k policy was ludicrous and that we should both just get a simple $5k policy like he has.

I have one of those cheap-o policies for my father. In his case, he has no debt nor any dependents, so he doesn't need any insurance. Also, he's HORRIBLE with his money, so there's no way he'll have even enough cash in the bank to cover funeral expenses should he die. So we got a $10,000 AARP policy to cover funeral expenses. If he dies within the next 6 years, we come out ahead.

Yeah, I understand that works for him. He's got no debt, the house was paid off years ago, and I'm the only child. He said he needs enough for burial expenses and that's it. What I was shocked at was him suggesting WE get $5k in insurance. With two kids under 6 and a some debt, we'd need a heckuva lot more than $5k to keep afloat should one of us (or god forbid, both) keel over.

That's not exactly correct - rates go up with age, but monthly. Eg, the rate for a 24'6 is higher than the rates for a 23 yr old, the rates for a 32 yr-old are higher than for a 31 yr-old - and so on.

Term rates are currently historically low - for a $1M 30 yr term policy the rate is roughly $20/m at your ages.

That's good to know. Thank you.

[mithrin]

Jan 7, 2011 11:47:48 GMT -5 HoneyBBQ said:

Whole life isn't necessarily a scam. It CAN be, but for some people/households it is a good vehicle.

That said, I think the 10x your salary is a very antiquated way of looking at it - especially if you live in a dual income household.

The way you should think about it is - if my spouse died, what would I need to continue my life?
For me, I'd want the mortgage paid off - because although I can pay for it on my income alone, it would be a big burden.
I'd also probably want 1-2x his salary to provide for his children in the future (one is over 18, one is almost 18).

So for me, I'd want around 4x his salary in insurance.

Now, if you have children, you have to play it two ways - one - if you die and your spouse is left to pay for everything alone, and two, if you BOTH die, what does the guardian of your children need to get them through life?

I like your point about the kids, although I'd turn it around. FIRST figure out how much would be needed to support you kids if you both died. That's the total life insurance that you want for the both of you. Then figure out how to divide that total so that each spouse would be okay if the other died.

Though I think a lot of people tend to count current salaries too much when deciding who to insure more. If one spouse is the major earner, and the other part-time or SAHP, why would the SAHP need a big payout if the earner kicks, but not the other way around? If the kids are still around, wouldn't you want the earner to be able to cut back hours or switch to a less demanding job in order to spend more time with the kids? Many couples will plan for a SAHP to remain at home, or work part-time when figuring out life insurance needs, but they fail to turn it around and think about possible voluntary income reductions by the earner to account for taking care of the kids (electing not to take overtime, etc.)

My dad worked a lot of 60 hour weeks when I was a kid, but if mom had died he would have turned down the Saturday overtime. And if it happened before we were old enough to stay home alone, it would have required him to pay for someone to watch us during the summers and during school breaks. So even though mom wasn't making much working part-time, dad would have been looking at a 15-20% drop in pay due to lost overtime + the expense of day care/babysitter until we got old enough to watch ourselves during the summer.