Over the past 1.5 years, I have experienced several significant life changing events (getting married in September 2014, moving, and had a baby in January 2016 – picture of Alex below!) that have given me the need to re-evaluate my current insurance needs. One of these potential insurance needs is life insurance.
The purpose of this post is to share my journey in to 1) discovering if this type of coverage is well-suited for my personal situation and if so, 2) how I went about obtaining life insurance from a provider.
Let’s get started!
A brief side note: In a previous post, I looked at whether term or whole life (used for the Infinite Banking Strategy) insurance was better suited for me, discovering that term life was more appropriate. As such, the decision of using term vs. whole life insurance is outside the scope of this current post.
Do You Need Term Life Insurance?
A logical first step in this journey was to answer the question, “Do I need term life insurance?” Therefore, this is the first topic we will cover.
Eric Tyson in his book, Personal Finance for Dummies, provides the following concise bulleted list of the types of people who DO NOT need life insurance.
“Single people with no children.”
“Working couples who could maintain an acceptable lifestyle if one of the incomes were to disappear.”
This essentially means that both individuals in the relationship earn equal incomes and/or have the same amount of assets.
“Independently wealthy people who don’t need to work” (ie people with rich relatives, people who have received a large inheritance, etc).
“Retired people who are living off their retirement assets.”
“Minor children who are dependent on their parents.”
Therefore, he suggests that anyone who falls OUTSIDE of these categories above NEED term life insurance coverage because you have others who are fully or partly dependent on your income.
In my case, I am not single, not (yet anyways) independently wealthy, not retired, and not a minor anymore. I am, however, married, and my wife and my incomes are pretty intertwined. Currently, we are essentially living off of my income and saving all of hers (she works from home and is self employed) for retirement and other purposes. In this regard, it could be argued that my wife is quite dependent on my income, and could not maintain our current state of living and working situation if I were to pass away. However, since my wife does have a master’s degree, I do believe she could find a non-self-employed job that pays a good income and providing an “acceptable” lifestyle within a couple years after me dying, if she needed to. Therefore, in the current state, it appears that I would need life insurance (but my wife would not), and that it would be of a reduced amount due to my wife’s future earning potential.
However, my wife and I also had a child in January of 2016, which will require support for a minimum of ~ 25 years, warranting a larger amount of life insurance for myself than if we had no children. Additionally, as David Bach recommends his book, Smart Couples Finish Rich (one of my favorites since it covers value-based financial planning!), a stay-at-home / working-at-home parent should also be insured, since if the working-at-home parent passes away, additional child care expenses would be incurred, which can be quite expensive if done full time.
My Decision: Because of the considerations above, it seems warranted for both my wife and I to have a term life insurance policy, in some amount.
What Type of Term Life Insurance Policy Should You Purchase?
So, you’ve decided that your personal situation is well-suited for obtaining a term life insurance policy. The next step is determining the type of term life policy that is best for you.
Below are the recommendations of from the books of several of my favorite PF authors:
Dave Ramsey in his book, Total Money Makeover, recommends to purchase a 20 year level-term life insurance policy.
Eric Tyson in his book, Personal Finance for Dummies, recommends to purchase a guaranteed-renewable policy that adjusts in price every 5-10 years over the period of time needed for life insurance coverage.
Stewart Welch, in his book, The Complete Idiot’s Guide to Getting Rich, recommends to purchase a 15 or 20 year level-term policy, with the reasoning that after 20 years, that should allow enough time to have accumulated enough wealth to be independent.
He also recommends a smaller 10-15 year level-term policy for a stay-at-home / work-at-home parent.
JD Roth in his book, Your Money The Missing Manual, recommends to purchase guaranteed renewable term life insurance.
David Bach recommends his book, Smart Couples Finish Rich, to buy a level term policy for 20 years.
From the advice above, the consensus seems to be to purchase a 20 year level-term policy, meaning that you have the same death benefit and same premium for 20 years. This is almost akin to the the fixed rate loan of the mortgage industry.
My Decision: From the advice above, it seems that 20 year level-term policies are best suited for myself and my wife.
How Much Term Life Insurance Do You Need?
Having decided that you need one or multiple term life insurance policies, the next step is to determine the Dollar value of coverage you need.
In reading the literature, there seem to be two ways of doing this – 1) going for a ballpark figure and obtaining coverage X number of times your annual income or 2) actually calculating the amount of insurance to purchase by predicting future needs, current income, investment rate of return, etc.
Listed below is a summary of my literature findings:
Dave Ramsey in his book, Total Money Makeover, recommends to purchase policy equal to about 10 times your annual income.
JD Roth in his book, Your Money The Missing Manual, recommends to purchase life insurance somewhere between 10-20 times your annual income.
David Bach recommends his book, Smart Couples Finish Rich, to buy a policy between 6 – 20 times your annual income.
Eric Tyson in his book, Personal Finance for Dummies, provides a nice table correlating the desired number of years of income to replace with a factor with which your annual after-tax income should be multiplied by to determine how much life insurance needed.
To replace 5 years of income, multiply your annual after-tax income by 4.5.
10 years –> multiply by 8.5.
20 years –> multiply by 15.
30 years –> multiply by 20.
Stewart Welch, in his book, The Complete Idiot’s Guide to Getting Rich, provides a pretty simple 3-step calculation (shown below) for determining life insurance needs (He recommends a $200,000 – $400,000 policy for a stay-at-home parent).
Multiply your total annual family income by 0.80 discount factor.
= Total income needed by surviving family.
Total income needed by surviving family minus surviving spouse’s annual income.
= Surviving family income need from outside sources.
Surviving family income need from outside sources divided by decimal form of rate of return expected on life insurance proceeds and other investment assets (0.075 is a reasonable estimate here).
= Total amount of money needed to provide for your survivors.
Total amount of money needed to provide for your survivors minus current savings and investments
= Total life insurance policy needed for deceased spouse (this calculation repeated for surviving working spouse).
In my opinion, the best approach (without considering costs/premiums) to estimating life insurance needs seems to be a hybrid one. This means comparing the results of a “more detailed” calculation with a quicker annual income multiplication (a factor of 20 seems best given the literature findings above) estimate and then use the most conservative / highest number.
My Decision / Results:
As mentioned above, I ran the numbers for my wife and I, and I can came up with 3 life insurance policy values for her, and 2 for myself.
Myself (not working from home)
First, I came up with a target life insurance value representing 20 times my annual gross income.
Next, I performed the calculation recommended in the book, The Complete Idiot’s Guide to Getting Rich, and came up with a value representing ~7 times my annual gross income, so much lower than the “quicker” 20 x estimate.
My wife (self-employed, working from home)
As I did with myself, I came up with a target life insurance value representing 20 times my wife’s annual gross income from working from home.
Next, I performed the The Complete Idiot’s Guide to Getting Rich calculation, and actually came up with a negative number after we subtracted our current savings/investments.
Finally, we have the number of $200,000 – $400,000 policy recommended for a stay-at-home parent, which is lower than the 20 x estimate previously mentioned.
Ideally (not considering cost), the general rule of thumb is that you want to be as conservative as possible with life insurance, and the most optimal course of action for me is to obtain two policies, one that represents 20 times my wife and myself’s incomes, respectively. This is the most conservative course because the 20 x estimates yielded the highest life insurance values.
Where Should You Buy Term Life Insurance?
So, you’ve decided what type of term life insurance you want to buy and a ballpark estimate of how much you need in a policy. Great!
The next step then becomes determining 1) where you should buy your policy and 2) how much will it cost.
Employer / Group Plan vs. Individual?
The general consensus in the financial literature seems to be that it is best to purchase a life insurance plan as an individual policy (in other words, not through your employer) since it is about the same price (health and disability insurance, however, are much cheaper purchased through your employer). This also avoids having to worry about if your life insurance is “portable” in that it follows you when/if you change jobs.
However, it is important to note that employers often do provide some amount of life insurance for free to you. For example, my current employer provides life insurance in the amount of 1x my current annual salary without having to pay any premiums myself. Of course, this free insurance is likely too little for most people who need life insurance, but it is a nice freeby!
Online – Direct or Through an Independent Agent/Broker?
Having now decided to obtain an individual policy, the question becomes, “Do you purchase the policy online or through an independent broker?”
It is important to stress here the word INDEPENDENT, as an independent agent/broker can shop around among multiple companies to find you the best deal. This is much different than a “captive” agent, who only sells for one company (examples include your local State Farm agent, local Geico agent, etc).
My opinion is that you won’t go too wrong by choosing either online or an independent agent. If you like to do things quickly and are self-sufficient, online is probably the best way to go. If you value the guidance of a real person, on the other hand, an independent agent is probably a good idea.
For me personally, the way I will likely go is to use both – first obtaining quotes online and then buying the actual policy through an independent agent (and using the online quotes to ensure that I am getting the best price from the agent).
Where Do You Obtain Term Life Insurance Quotes Online / How Much Does Coverage Cost?
The following sites were recommended in the PF books I have previously mentioned in this post as good sources for term life insurance quotes:
Reliaquote
Selectquote
Term4Sale
Ameritas
Einsurance
Intelliquote
Insweb
Insure
However, having gone through the process of obtaining quotes from these websites, the most straightforward sites (which give you a immediate online quote the fastest and don’t require an agent to spam your phone 5 times per day) I found are listed below:
Reliaquote
Intelliquote
Term4Sale (my favorite site)
My Results
For myself, the best premium quotes obtained from the 3 websites above for a 20 year level-term life insurance policy in the amount representing 20x my annual gross income were around $80 per month, or $960 per year.
For my wife, the best premium quotes obtained a 20 year level-term life insurance policy in the amount representing 20x her annual gross income were around $24 per month, or ~ $294 per year.
So, if I was to go the most conservative route and choose to obtain life insurance policies equal to 20x our annual income, we would be looking at spending almost $1,300 per year on life insurance premiums.
Reality Check Based on Online Life Insurance Quotes
However, looking at the $1,300 per year price tag for maximum life insurance sort of bothered my cheap side.
While I could definitely afford $1,300 per year in premiums, it makes me wonder if it is necessary / worth giving up the chance to invest that money. This seems more appropriate in my personal situation given that I have been saving since I was 18 and have accumulated a medium amount of assets for a 30 year old. In other words, I simply don’t “feel” that it is necessary to have the largest amount of life insurance possible (20x annual income).
What Is The Purpose of Life Insurance For You?
So, where do you go from here if like me, your reality check revealed that 20x annual income is too much of a premium to warrant the large amount of insurance?
Personally, I next asked myself how I would want my life insurance policy to be used if I were to pass away. I would essentially want my life insurance policy to 1) pay a lump sum, 2) be invested by my surviving family at a reasonable interest rate, and 3) provide enough income for my family to live off of without them having to touch the money I have currently saved for retirement (so it can be used for their retirement).
In other words, my desire for how life insurance should be used is quite similar to the policy value calculation method from Stewart Welch, in his book, The Complete Idiot’s Guide to Getting Rich, discussed previously. However, current savings and investments would not be subtracted at the end since I would want to preserve that.
Performing this calculation lands me at needing a term life insurance policy approximately equivalent to 10 times my current annual income, which coincidentally, is what Dave Ramsey recommended in his book.
Listed below are the premium quotes for 20 year level term life insurance policies for my wife and I equivalent to 10x our annual incomes:
Wife – $17 per month, or $204 per year.
Myself – $49 per month, or $588 per year.
Total for 10x annual incomes policies = $792 per year, which seems pretty reasonable.
Term Life Insurance Application Process – Independent Life Insurance Agent
Armed with the prices of the term life insurance quotes obtained online, I then approached an independent insurance agent (the same insurance agent through which we obtained our Acuity homeowner’s insurance) in our area to also provide me with quotes for the same type of life insurance coverage.
As expected based on my previous experience with this agent providing very competitive pricing, the quotes provided by the independent insurance agent for the same type of term life insurance coverage for my wife and I were either similar or cheaper than the quotes I found online. As such, I decided to proceed with obtaining life insurance through the agent.
Step 1 of the Term Life Insurance Application Process – The Application
Shortly after giving the go-ahead to my agent that we wanted to proceed with obtaining life insurance through him, my wife and I were contacted by a third-party hired by the insurance company (Protective Life) to handle the application process.
The questions they asked us to provide answers for were pretty straight-forward and expected (everything needed to assess when we would potentially die and our ability to the pay the annual insurance premiums):
Current and past job information, including salaries.
Checking, savings, and retirement account information.
Information about what debt we currently are carrying.
Current and past health information, including history of diseases in family, health problems, and doctor contact information.
Step 2 of the Term Life Insurance Application Process – Health Exam
After completing the paper/electronic application, my wife and I set up appointments for a comprehensive life insurance exam through another 3rd party (ExamOne, part of Quest Diagnostics).
The health exam included getting our physical vital signs taken (heart rate, blood pressure, etc), a question/answer interview session about our health history, and blood + urine samples submitted for an in-depth battery of tests for indicators of the function of our internal organs. Being a scientist myself, I was pretty impressed at the large number (approximately 30) of test endpoints that our blood/urine was measured for.
Step 3 of Term Life Insurance Application Process – Underwriting / Life Insurance Policy Approval
After we received the laboratory results from the health exam, our entire insurance application was reviewed by Protective Life’s insurance underwriters to determine our risk of death, insure-ability, and what level of premium to charge us.
In the end, my wife received the highest health rating (lowest premium pricing), and I received the 2nd highest health rating (2nd lowest premium pricing). We then reviewed/signed Protective Life’s insurance offer to us. The finalized premium pricings are shown below. As expected, they were right on par with the online quotes and the preliminary quotes from the insurance agent prior to submitting our application.
Cost of my policy – $49.49 per month
Cost of my wife’s policy – $14.94 per month.
Protective Life – Universal Life Insurance Structured as Term Life Insurance
One interesting twist came up when I was doing the final review of the policy offers from Protective Life. Intriguingly, instead of issuing a straight-forward term-life insurance policy, Protective Life insurance issues term life insurance policies as Universal Life Insurance.
A usual universal life insurance policy features a portion of the monthly premium going towards building cash value in some sort of investment vehicle. However, the term-structured universal life policies we obtained from Protective Life had no dividend payments, and no premium goes towards building policy cash value. The policy is designed to have a level/constant face value and non-changing premium cost for the 20 year term that I requested.
After 20 years, the policy provides the flexibility to continue having life insurance coverage if I so choose. Each year after the 20 year period, the face amount of the life insurance coverage decreases, and after ~ age 80, the premium cost would increase. However, I don’t have any plans to continue the coverage after the 20 year period.
So, there you it – our journey of obtaining level-term 20 year life insurance policies. Overall, I was pretty satisfied with the process, and it wasn’t too much of a headache at all. We are happily paying our ~$65 per month of premiums through automated bank withdrawals, and we haven’t really noticed any significant difference on our monthly finances.
How about you all? Do you have life insurance coverage? If so, what type of insurance did you opt for? Did you purchase online or through an agent?
Share your experiences by commenting below!
