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How do you decide how much life insurance to carry?

Every other Monday, I answer a question or two from readers. Got one for me? Send me an email!

I’ve been researching life insurance. My husband and I each have a bit (me through a whole life policy my parents purchased when I was a child; him a policy that his employer pays for that provides 1x his annual salary), but now that we have multiple children, we think it would be helpful for us to have more than that.

life insurance question

Do you have any thoughts on life insurance – how to find the best quotes (wouldn’t it be great if life insurance companies just published their rates instead of making you go through a whole long process just to get a quote!) and how you’ve figured out how much you need?

Any thoughts on long term disability or other types of insurance along those lines? And/or whether or not you purchase any life insurance for your children (because it’s so much cheaper to get a policy set up when they’re young than it would be for them to purchase later on!)?

Thanks for any thoughts you can offer!

-Alison  

Yes, it would be so much handier to shop for insurance if you didn’t have to apply first.   I’d like to buy it off the shelf, like you buy a box of cereal.

(Another similarly hard thing to shop for: mattresses. Oh, how I hate that!)

Sadly, I’m not aware of a simpler way to shop for insurance, although perhaps some readers will have ideas for you.

Anyway!   We currently have life insurance through the same company that provides our home and car insurance.   We switched to that company a few years back after realizing that we were over-paying a bit for our home and car insurance.

When we choose life insurance amounts, we try to take a realistic look at what either of us would specifically need if the other spouse died.   I think it’s easy to buy into the idea that you need to carry a multi-million dollar policy, but that has not seemed necessary to us.

If I’m the one left on my own, here’s our plan:

If I didn’t have to pay a mortgage, it wouldn’t be that hard for me to earn enough to cover the rest of my expenses, especially if I was careful with my spending (which we know I’m quite capable of. Ahem.). So  on Mr. FG, we carry enough for me to pay off the house and cover funeral expenses.

life insurance

(As far as income production for me goes, I have my blog, I could take up piano teaching again, I could pursue photography for pay, I could start a decluttering business…I have lots of options that could cover non-mortgage bills.)

If Mr. FG were left on his own, the household income wouldn’t take as much of a hit, but he’d probably need to hire some help to cover some of the work I do, and to cover childcare (though our kids are getting closer and closer to not needing that much, even the younger ones.)

So, we carry less insurance on me…enough for a funeral, and to give him a fair amount of extra cash to help hire out tasks I do.

We do not carry any life insurance on our kids.   We look at life insurance as a way to replace income loss, and at this point, our kiddos, much as we love them, are income-suckers, not income producers.   So, we haven’t felt the need to insure them.

I know some insure their kids to cover any possible funeral costs, but we do have an emergency fund for unexpected expenses and we’re comfortable leaving it at that.

Mr. FG has disability and accidental death type of insurance through his work, and we’ve just left that coverage as-is.   As far as I know, we don’t have that type of insurance on me, as I’m self-employed.

I think that about covers it!  I’m no insurance expert, but I hope it’s helpful to hear what we’ve done.

In closing, I’d say the most important thing is to consider what you are wanting life insurance to do for you.   Think through what each of you would need, financially, to manage on your own, and then get enough life insurance to make that happen.

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Readers, how have you decided how much life insurance to carry? And do you carry life insurance on your children?   Share your thoughts and help Alison out!

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Stephanie L

Friday 6th of November 2015

When the hubs lost his beloved stepfather, and we saw the unbelievable toll it took on his mother, we re-examined what we'd want. We also realized that his stepfather's extended illness (brain cancer) had depleted their financial reserves before he died, so we want to have a cushion for that.

Good for you! Too many people are so skittish about this part of life and just refuse to make plans. I consider it an act of love to spouse and family.

Since I out-earn DH I carry more insurance. He himself says that he is terrible with money, so if I go first then his portion of the inheritance will not be released in a lump sum.

After I accrued six weeks of sick leave I stopped paying for short-term disability. The conventional wisdom is to hold off on longterm care insurance until you're in your 50s, but because of my lupus I went ahead and got it.

I have to say, though, that there is great peace of mind in having no debt besides the mortgage. We Dave Ramsey'ed ourselves out of a mess 8 years ago and I still refuse to get a credit card, and we've purchased our cars with cash.

Kristen

Saturday 7th of November 2015

So true...and I'd really love to get rid of the mortgage too! That would be totally awesome.

Brynn

Wednesday 4th of November 2015

My husband and I both carry large policies, and in my mind with good reason. My father died when I was 19 years old. He did have life insurance, but not enough, and at 72 years old my mother still works full time. My husband is our main earner, so he does have a larger policy than I. We have 2 children, one of whom has Cystic Fibrosis. I want to never worry about money if my husband God forbid were to pass away. Similarly, if I can ease his burden and leave an amount comfortable for him to travel, pay the house, pay for our daughters weddings...that brings me comfort. I can't know what the future will bring, and it is worth it to us to pay a small bill each month in order to have peace of mind that money will not be a worry on top of grieving.

Stephanie L

Friday 6th of November 2015

Brynn, if you haven't done so already you may want to consult with an attorney about a special needs trust. I worked with disability issues for years, and there are ways to set up inheritance that would allow him to still qualify for assistance.

Carla

Monday 2nd of November 2015

Ok, so I have to chime in here on the "publish rates vs. long process to get a quote". You would be *shocked* at how complicated it actually is to calculate your premium. Trust me, the insurance companies would love for it to be simpler for you to get a quote; it makes it more likely you would follow through on buying a policy. I know, at least for auto and homeowners insurance, rates are published with the state department of insurance. However, there are so, so many different factors that go into the process of calculating how much your individual premium will be, that it is genuinely impossible to just look at a quick table and see how much you will be charged.

As for Kristen's "buy insurance like a box of cereal", just like people have different needs for insurance, people also present different risks to an insurance company. Your individual attributes are critical for assessing the likelihood the insurance company has to pay out on your policy. If everyone paid the same amount, the less risky people would have to subsidize the more risky people, and they would rather save their money. :)

Stepping down off my soap box now, as you probably already realized all this (and I do sympathize with the desire!).

I do think Kristen's advice to think carefully about your individual needs would be when/if you need the insurance is very good. I would recommend using a life insurance needs worksheet (can be found on many insurance company websites or other places) to help you think through this as it can prompt ideas on income or expenses that you may not have remembered. Talking with an insurance agent can also be helpful; just don't feel bad to ask questions and make sure you understand their recommendations. And as already mentioned, bundling insurance policies under the same company can give you a discount. Certainly worth checking.

Kristen

Monday 2nd of November 2015

Oh yes, I'm sure they'd make it easier if they could!

(Unlike mattress companies, who I am convinced are purposely making it difficult to shop and compare. ;))

Tarynkay

Monday 2nd of November 2015

Here is my PSA: please have a will and trust set up with guardians and back up guardians appointed for your children. Make sure your family knows about your wishes! You can also specifically (and confidentially) exclude people from being appointed as guardians if you feel there may be conflict on this point.

Children cannot inherit or be paid out by life insurance until they turn 18. Then they turn 18 and get it all at once, which is usually not the best case scenario. So trusts are a great work around for this, and not just for the very wealthy.

As to life insurance, we have term on both of us. We are young and healthy, so it's pretty cheap. Our kids are younger and my husband usually works 60 hours a week. So we have enough that if I die, my husband could hire a nanny to cover those hours.

We don't have life insurance on our sons. My sister did buy whole life policies for her kids- her son has type 1 diabetes and this way he can carry this policy into adulthood. She was advised that he will be uninsurable as an adult due to his diabetes. So she saw it as a way to look out for his future dependents.

aruna

Monday 2nd of November 2015

I personally will not purchase a whole life policy so I have a term policy that will expire when my youngest son turns 24. I am following Dave Ramsey's principles so I hope that I will have my house paid off by then and will not any life insurance if not a very small amount.

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