Insights Into Life Insurance From An Actuary

One of my closest friends in the world completed a Ph.D. in mathematics recently and became an actuary for a very large life insurance company. I had lunch with him recently just to catch up on things and we spent about ten minutes talking about life insurance itself. He basically told me that if I am a financially sound person, I am throwing my money away on life insurance unless I meet a few strict criteria (young, a relatively low net worth, and young children). This kind of blew me away considering he’s in the life insurance business, but when he broke it down for me, it made a lot of sense. Note that the advice that follows is based on a conversation between friends and shouldn’t be viewed as professional advice and you shouldn’t just follow it blindly without doing your own research (like on this site here), but it is quite interesting and worth sharing.

First of all, unless you are a financial train wreck, you should never buy anything but term life insurance. Insurance as an investment is a great investment for the insurance company but a terrible one for you. If you want insurance, get insurance; if you want to invest, buy an investment. Don’t mix the two – it’s akin to buying a box of bad cereal to get the cheap plastic toy inside. Why not just save a buck and get a better box of cereal, then spend the buck to get a better toy? If you are convinced to use your insurance as an investment tool, you must understand how to do it. Use TSD’s advice on: cash-value, life insurance settling, and building and borrowing cash from your life insurance policy.

Second, if you have no dependents and no spouse, don’t buy life insurance. Ever. Don’t let a salesman talk you into it.

Next, the more net worth you have, the less insurance you need. This means that before you start thinking about life insurance, know what your net worth is. This is an important number for figuring out how much net worth you’re going to need.

After that, think about your family’s needs carefully. Look at how many people are in your household (spouse plus dependent children) and multiply that by five, or maybe a bit more if your children are very young – this number is the number of years worth of your salary that would be needed to support each person in your house should you pass away. He suggested multiplying it by six in my situation, but I wanted plenty of security for my kids, so I used eight. I then multiply it by the number of people in the household, four. That gives me thirty two. This number is the number of “salary years” that I should leave behind.

Then, multiply your calculated “salary years” by your current salary (or reasonably expected salary in a few years) to see how much net worth you should leave behind. Let’s say I make $50,000 a year; times thirty two, that means I need to leave behind $1.6 million. Ouch. That’s a lot.

However, one should subtract from that their net worth. I would make a little dent in that number, but not a big one, leaving me with still quite a sizeable policy. If I went with a lower multiplier (say, my friend’s recommended 6), I could reduce the policy quite a bit.

Once you have your magic number, get a relatively short term policy for that amount, usually long enough for your children to have left the nest. For my example here, that means I would get a twenty year term life insurance policy for $1 to $1.5 million. The premiums on that would be $600 to $800 a year, or $50 to $65 a month. He suggests doing this so that one can potentially get a better rate with a twenty year policy instead of a ten year one, but that policies that extend past the children leaving the nest are a fool’s game.

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When your policy expires, don’t renew it immediately – recalculate. Let’s say that in twenty years, my children have left the nest, leaving my wife and I home alone together. We’ve built up some serious savings, our home is paid for, and thus our net worth is in pretty good shape. I sit down and recalculate and discover that in fact my net worth now exceeds ten times my salary (five times the people in household, which would be two), so I just don’t bother with life insurance again, leaving me with $50 a month more to enjoy or invest.

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  1. Ted Valentine says:

    Dave Ramsey says you need 8 to 10 times your income in level term life insurance in a 20 or 30 year policy. After that policy expires you should be “self insured” by your net worth.

    That’s much simpler than the calculation you went through.

    I also think you counted yourself, and unless you know something we don’t, you’re not going to need any money when you’re gone.

  2. not sure... says:

    Do you have any advice for people where a family member setup a life insurance policy in their name at a young age? My grandfather set up a 100k policy for me before I was 5 years old. There was a 1 time payment of 5k and there are no annual premiums or fees that I have to pay directly on the policy, the money has been growing interest tax-free for close to 20 years now and I recently transfered the policy to my name.

    Is it best to just let it alone and keep growing or pull the money and use it in a retirement account? This may depend on the situation but just thought I’d put it out there to see if anyone has any advice.

  3. Kristina says:

    I don’t understand the figure used to calculate how large of a policy one should have. All you need is enough money to roughly replace the income you brought to the household before your death. So, figure out what rate on return is reasonable, and buy a life insurance policy that will return that rate annually. That way you draw out an annual “salary” and the base remains the same to continue to support the family. So, let’s assume an average 10% return a year in a good Vanguard mutual fund. On a $50,000 salary, one would need a $500,000 life insurance policy to continue producing that annual salary. Even if we want to be incredibly conservative and say it’s only going to get a 5% return in a CD or money market fund, that’s still only a $1 million policy.
    Your friend’s calculation seems a bit over-kill.

  4. Laura S says:

    Interesting. Some of this makes sense, although my father who’s a financial advisor for a living would probably advise you quite differently. He bought me 3 life insurance policies when I was born that have now built up a serious cash value that I can borrow from without cashing in the policy; it can be paid back on my own terms rather than the bank’s and has a way better interest rate than I qualify for on any other type of loan. I consider it one of the best gifts he could have ever given me. Then again, I’m pretty sure you wouldn’t be able to buy the same type of policies today for the same prices – these were bought in 1980!

    What did make me wonder for a moment was why you think it’s unimportant to have a life insurance policy with your children as beneficiaries if they are over the age of 18. I’m 27 now and although I can pay my bills and save for the future, I would benefit immensely from a financial inheritance at this point in my life if one were to be left to me. Even more importantly, what about a 19 year old just starting college with no means to pay the tuition? A 22 year old new graduate with an entry level job that pays so little they can’t afford to move out of their parents’ home? I’m just curious as to your opinion on that because those are the types of financial situations common for that age group. If I had a child that age I would want to ensure they would be financially sound if I were to pass away.

  5. Don says:

    I don’t understand the bit about multiplying by the number of people in the household. If I want to provide for 5 years after my death, I would just multiply salary * 5 (maybe add in an inflation adjustment). Right now I support everyone on my salary alone, I don’t support everyone on my salary multiplied by how many people there are.

    Otherwise I like this advice. Thanks!

  6. Don says:

    Laura, the thinking is that in 20 years you’ll have more net worth to leave to your kids. Things like Roth IRAs or 401(k)s and maybe a paid-for house. Those are the things that you leave to your kids.

    I don’t think that term life insurance is meant to be a windfall for those out of the nest. It’s to help surviving dependents cover expenses.

  7. Kristina says:

    Laura,
    Whole life insurance (what you have) is a gimic and a waste of money for consumers but a huge source of profit for insurance companies. It has huge fees and low rates of return on what you have “invested”. If you and your father had taken the payments you’ve made on your whole life policies over the years and put them into real investments, you’d have much more money today. And it would be completely liqid – not sitting inside an insurance policy. And you wouldn’t have to “borrow” it to use it. Also, when you die, the “cash value” disappears (goes into the insurance company’s pockets).
    Term insurance is the way to go.

    As for your second set of questions…life insurance is a risk management tool. It’s spending your money on managing financial risk because you do not have enough financial strength as a family to live at the same level if someone died. It’s an EXPENSE. It’s not a way to pass on an inheritance! So, the second someone can get by without insurance (ie, no dependents or enough savings), you cancel life insurance and put those premiums into real investments. And while 18 year olds might always appreciate getting money from an insurance company, they are adults and are usually fully capable of entering the “real world” and supporting themselves if their parents died. The point is to have insurance for a given period of time, and during that time you live a financially responsible life so that you don’t need it when the term comes to an end…either you have saved enough for your kid’s college, or you have enough net worth for your family to get by, or your dependents have all moved on, etc. Insurance is an expense, and the goal is to eliminate the need for it and use your money on for something more profitable.

  8. jake says:

    There is something about life insurrance that always made me feel sorta uneasy, but interesting topic.

    For me I try to make it so that I dont have to buy life insurance. My goal is to not need it and that forces me to be more involved in my finances.

  9. Ted Valentine says:

    Laura,

    My 19 to 22 year old needs to learn to be responsible for their self like I did. My child will be financially sound through knowing how money works and by working for it. Not from a handout. I fed them, raised them, gave them a roof, an education, and then they want a lottery ticket when I die? Come on.

    The last thing I want to do is create another trust fund baby (can anyone say Paris Hilton?).

  10. jake says:

    I’d have to mostly agree with Ted, in this day and age people tend to give their kids too much without them having to work for it.

    Michael Jordan made the same comment about today’s NBA players. He said that when he was playing basketball you had to play first and prove yourself before any contracts came. Now kids fresh out of college and high school are given 100s of millions of dollars before they even play a game in the NBA.

    Sometimes when thinking about this I am inclined to just donate everything to charity or a worthwhile cause than give it to family. Just like Bill Gates and Warren Buffett have stated. They will only give their kids a microscoping portion of their money and expect their kids to earn money like everyone else. In other words no free rides.

  11. Mitch says:

    I agree with Ted that the parent of a child over 18 isn’t obligated to the child. And a child over 18 is no longer a minor and isn’t obligated to the parent.

    But every family is different. In some families there are unofficial agreements that certain kinds of help will be exchanged, especially for children in their early twenties and parents at the end of life. If there’s a healthy relationship I think that’s okay, and I wouldn’t say it’s crazy to plan to help provide for those few extra years; life insurance is in some sense about preserving the integrity of your financial intentions. If money is a weapon in the family, though, no way.

    Example: some subcultures value education so highly that they expect teenagers to prepare for college by studying rather than working for wages.

    Example: children often help with major family projects, such as helping keep the business going during rush times, or care of a family member, so that everyone taking care of everyone is the norm.

    Don, I don’t get it either. Maybe a little extra per child for flexibility’s sake, but multiplying by number in family I don’t understand. Usually what I see is some multiple of the annual salary, then eat through it. It’s like a temporary retirement (so yes, you’d want to be investing it conservatively).

  12. Kristina says:

    In sound financial planning, life insurance and inheritances are SEPARATE matters. If you want to leave your kids an inheritance, that’s fine. But, inheritances are the wealth that people have built over their lifetimes. They should NOT be insurance. Insurance is not meant to be an “inheritance” (even though some poor people who don’t understand finances or who are so hopeless they can’t imagine building assets continue to think this way). Insurance is a risk-management tool that is meant to temporarily preserve the quality of life of a family when someone dies.

    If you want to be financially strong (and possibly wealthy), do not think of insurance as “inheritance”. Think of it as an expense for temporary risk-managment. Then build wealth over the long-term according to how much you want to leave to your loved ones.

  13. Eric says:

    I think you got hosed on the “Magic Number”. I sat down with my wife and we decided together that I would settle on a number that would pay off all of our debts ( including the house ) as well as leave her with a large enough nest egg to transition to a new way of living.

    For me that ended up costing us around $15/month and the rest we can invest. A 1+ Million dollar policy seems to be VERY overkill and not a good bet.

    Especially after your last post… a cautionary tail of children fighting over money that they didn’t earn themselves.

  14. Jared says:

    Good post! I never even considered life insurance until a couple of weeks ago when I got engaged.

    I think most people are over insured when it comes to life insurance, and under insured when it comes to auto liability (I wonder if Insurance sales people get a higher commision on life than auto… OF COURSE THEY DO).

    My mom, the nest egg super saver in the form of CDs only type (anti-risk) and dad who taught me a bunch of good lessons on frugality only had a small life insurance policy the whole time they were raising me and my 2 brothers, but when I was in high school (and living in their home) I had to keep 100/300/100 coverage on my car/truck for them to feel comfortable about me being behind the wheel.

    I would like to see what kind of post you could put together about my net worth vs. my auto policy liability coverage in todays litigious society.

    Great Blob by the way… my first time to post, but I have been reading for a couple of months.

  15. Kirsten says:

    I don’t quite agree with all of what you said. I’m 20 years old, not married, have no children but still have a life insurance.

    Why? Because it’s a fund-based insurance that I stop paying in when I’m forty-something but that leaves my money in the associated funds until I say I want it. Assuming I don’t die before I retire, this will provide for a large chunk of additional income then. And on top of all that, I’ll get all paid-out money tax-free.

    What I want to say is that you might want to be careful with the phrasing of your second point because I believe I have just proven that there are occasions when you might consider this option.

    (The reason I took out the life insurance this early was that the government planned and has since abolished the tax-free returns. If I had signed up for it just one month later, all payouts would be taxed at a standard income tax rate)

  16. Trent says:

    Remember, children change the equation drastically.

  17. ck_dex says:

    Because our estate would be subject to federal and state estate tax if my spouse and I both died, we maintain enough life insurance to pay our estate taxes. Of course, if we die in 2010 when federal estate taxes temporarily disappear, all the better for our heirs!

  18. Kim says:

    One arguement for having life insurance at a young unmarried state is you never know what will happen to your health. One friend had a heart attack in his early 20′s and another developed cancer at 23 and died of a recurrance after 5 years. They both would have been uninsurable and had nothing to leave their wives and children had they not had their policies before their health changed. If marriage and children are in the eventual plan I think it’s worth considering.

  19. Peter says:

    I second the comment above — it can make sense to get a 30-year term life insurance policy when you’re young, even before marriage or kids… because by the time you have a marriage or kids, you may have accumulated health issues which preclude an affordable policy. I.e., you should consider buying 30-year term 10 years before you’ll need 20-year term to make sure you can get a 20-year policy when you need it.

  20. Mark says:

    Life insurance is dependant on the individual. What most Americans seem to forget is they have the right to choose the beneficary. This means if you don’t want to pass it on to your children, give it away to a child in a third world country, its still your money. just like you invest in a mutual fund and the mutual fund company makes millions of dollars off your investment each quarter so some of these comments are moot.

  21. Vinaya HS says:

    Where I come from, there’s rampant misselling of insurance policies. Insurance is, almost always, viewed as a shield against paying income tax (because the money you put in an insurance policy is directly deductible from your taxable income). With the economy booming, a recent problem has been the gross misselling of Unit Linked Insurance Policies with agents wrongly promising 50 – 100% returns.

    Term insurance should be the only form of insurance. I certainly have made the mistake of buying endowment policies in the past.

  22. Tim says:

    I wouldn’t buy life insurance for a spouse unless they do not work, or their salary wouldn’t maintain current expenditures.

    Kirsten, normally you want to keep life insurance and investment separate, because you combination vehicles generally aren’t maximizing your dollars. I remember twentieth century pushing life insurance under the guise of mutual funds. The real catcher was that most of the money was toward the life insurance premium, while the investment portion was very small with high fees.

    i agree that life insurance for the purpose of kids should last until 18-20, which they will then be capable of living on their own. you can do much better for them investment wise investing in 529′s etc.

    life insurance should offset, cover expenses, and provide funds for career change, not to provide wealth. you are better of investing the difference in premiums. remember insurance companies have tons of actuaries who have figured out that you are more likely to pay more for insurance than what they will pay out. it’s like any other insurance, you can pay more for coverage, but in reality you only need much less.

  23. miguel says:

    Nice post. I just recently applied for life insurance, and I followed the exact same logic that you posted. I only did a 15 year term. In that amount of time, I might need to renew but it will be for a lot less. I also took out less for my wife than I did for my policy.

    My logic is that while she doesn’t earn an income, I’d need to pay for child care, and she contributes in a lot of other ways.

    If we both die my kid gets a lot of cash.

  24. I used very similar analysis when I bought my policy a couple months ago. I ended up settling at a $1.1MM policy. I have a 1 year old and a 3 year old. I got the policy for 10 years, letting me pay only $180 a year. After 10 years, I will recalculate my needs. Based on my annual retirment savings, savings for kids’ college, and the fact that they will be 11 and 13 at that time; I will only need about $500k in insurance. I’ll get that for another 10 years. At that point, I’ll have just 1 kid in college, my final house paid off, and a net worth of hopefully about $2.5 MM. No need for insurance then.

  25. Sopheak says:

    How about Long-term care?
    “For a couple turning 65, there is a 70% chance that one of them will need long-term care.” – Wall Street Journal

    That being said, LTC cost an average of about $150/per ($234,000/yr). I work in the industry and I believe that it’s a great way to ensure that you will have something to leave behind if you were to need LTC when you get older. The premium for LTC are the same until age for so you might want to look into that because it gets more expensive after the age of 40.

  26. Don says:

    broknowchlatr,

    Why not get a 20 year right away? In 10 years your rates will probably be phenominally higher than they are now. In 10 years your kids will still be only 11 and 13, certainly not able to take care of themselves and will still need your assistance.

    Even if you do cut the payout in half, I think it makes more sense to just get the 20-year term right away and be done with it. It’d be interesting to see what the rate is in 10 years for $500k vs a 20-year rate for $1m now.

  27. formul8 says:

    I have been in the insurance biz for a while now. Here is the best way to figure out how much you need:

    Minimum 10x’s your annual income, but goes up depending on age. The younger you are, the more you need.

    For example: 30yr old male, wife (homemaker), two young children and a $50K salary.

    I would recommend a 30yr term at $1,000,000. Rates are incredibly low in this age bracket. I work for a nationwide broker with 40 companies and the best rates out there. Believe me, it’s cheap.

    Reason: You want to replace income over a certain amount of time. If the breadwinner died tomorrow, how much money would be needed to replace that income and live the same lifestyle? Granted, there are certain variables like inflation, but over all the $1m is worth less over time but one’s net worth increases also (at least it should!). 30yr term because you want to lock in the rate for as long as possible. The older you get, more life insurance costs to start up and if you are healthy TODAY, then there is no better time.

    Buy insurance BEFORE you need it, because it won’t be available after.

  28. jgs9455 says:

    I don’t have a wife or children yet but I still carry the inexpensive life insurance my company offers. I figure that it’s cheap, and if I kick the bucket at least my brother and siter can pay of thier debt and maybe fund their childrens’ educations.

  29. I don’t have life insurance. There is just DH and I we only have each other so he won’t buy it. We only have a mortgage with 20% DP, paid off another 5% and we have another I think 5% in cash. So I don’t know if we really need it. By the time we have kids I still am not sure, but we’ll probably get some.

    We probably will decide at that time.

  30. Bill says:

    Statistically men still earn more than women.

    Especially with young kids, you’ll need money for more than a short transition period.

    A man needs to plan to cover the lifetime gap between their earnings and her future earnings.

    And has no one considered disability?

    An accident that kills the insured could easily disable their partner or their kids.

    An extra $500,000 of coverage on a 20 year term policy for someone in 20s or 30s won’t be much more money on a monthly basis.

    But it could be the difference between keeping a disabled survivor at home versus in an institution.

  31. What about if two people in the household are wage earners? It seems that it might change the equation some. For instance, my future wife’s income is relatively pretty far above average – enough so that supporting a child or two on itself is probably possible without my income at all. That would seem to impact the equation.

    I like the simple math of taking your salary and dividing by .06 or so… The reason for the .06 is that it’s roughly what the money invested would make after inflation if invested. It’s really no different than the 4% the “experts” give you to estimate how much you need to retire. It’s just the reverse calculation. Either way you are trying to figure how to replace your current income.

    (This comment I skipped a lot of math because it’s far too complex for this space).

  32. This is a very timely for me. I fall under the “no dependents” category and almost got talked into buying insurance. Great article as usual.

    Submitted to reddit:

    http://reddit.com/info/1wzuo/comments

  33. rhbee says:

    You by life insurance for one of two reasons they say. Either you love someone or you owe someone. This is why if you buy life insurance it should be some combination of term and whole life. After a couple of years of paying into whole life you can begin to borrow against the equity. Since whole life usually pays(not garunteed) an annual dividend you can actually reach a point where the insurance literally is paying for itself. This is how our “finacial engineer/insurance salesman” explained it to us.

  34. Bill says:

    You’ll never reach that point in real life.

    I have a client paying over $10,000/year for a $500,000 whole life policy (continuity of business coverage)

    The policy has been in effect for almost 25 years (at this point, given their health, they’re stuck with it)

    The dividend reduces the annual payment by about 15%, but comes nowhere near paying for the policy.

    >reach a point where the insurance literally is paying for itself.

  35. Peter says:

    I prefer Guaranteed Annually Renewable Term Insurance to 10 or 20 year level premium insurance. Each year, the premium you pay is commensurate with the risk you’ll actually die in the next year. For most this results in much lower premiums earlier in the policy. So you can invest the savings for later when the premiums are higher, and eventually come out ahead.

  36. KMull says:

    Do you know if anyone has done the math on long term life insurance (20-30+ years). Take a million dollar policy. That’s a million in today’s dollars. Is it really worth it?

  37. Adventures In Money Making says:

    great advice.
    i’m currently looking at a policy and i’ve come to the same conclusion (in terms of type, duration, policy amt and premium) but it was more intuitive. thanks for the clarification.

  38. Brandon says:

    The honest truth is, everyone buys (or does not buy) life insurance for their own reasons. I cannot say, professionally, that life insurance is right for everyone, or that a particular type of life insurance is right for all occasions. In fact, I counseled a client just today to NOT BUY as she really had no need.

    Quite possibly, the smartest advice I ever received was, “Don’t put all of your money in one basket.” Whereas many on this forum pursue the, “buy term and invest the difference” philosophy, or the, “buy variable life and invest within” philosophy, neither may make the best use of available solutions. The right solution is the one you develop, or better yet, the solution you develop with the guidance of a life insurance professional who helps you like a teacher. This teacher will best equip you to make your own decision. My decision, and commonly the decision I recommend to my clients, is that we don’t know the future, we don’t know whether our need for life insurance will increase or decrease, and we don’t know what the most (tax) efficient road to meet our financial needs will be. So let’s set ourselves up now, to be able to choose from a broad array of options in the future.

    2 cents.

  39. anne says:

    I quit reading about mid June 7th posts. Having been one of the working poor in the 1980′s, who was lucky enough to get into a home of our own at a good fixed rate 30 yr mortgage on about 30,000 max a year net for 3 people … I cannot believe what some of you have to say about 18 to 20 somethings being able to support themselves on a part-time or even full-time minimun wage job … are you kidding me ??? with no health care coverage, with what kind of lifestyle ??? do you realize that most of the jobs you are talking about with any other opportunities for growth are in major cities where rent is incredibly high, are you assuming that they can save anything and also afford to run the roomate rollercoaster-ride with its depostits and all the other expenses
    without you to be there if they fall ???
    OMG !!!! What planet do you live on? the all will be taken care of American planet that no longer applies to a huge majority of stressed-out struggling, and overburdend working poor … ???
    Despite what you may think this is not a political rant … what if they get sick ? what if they get a mental illness? Just because it was the best you could do, does that mean it truly addresses quality of life?
    That said, my 21 yr old daughter and I have discussed this, she has 3 more years to her bachelors, and we think, and we are hardly alone, that a bachelor’s degree without specialization is not good enough generally speaking, for owning a home, having health insurance, and raising children … not to mention the cost of transportation, be it a car or public …
    Plus she would be devastated if I died and need at least a year for grief and recovery … if you could provide this for your children why wouldn’t you.
    I concede that I trust my daughter as she has proved her responsibility in general and her financial responsibility specifically … and I would happily give her respite for a few years to get over my loss and the means to make continued education a less stressful proposition.
    As it is she works hard at her job as a student, and at her job as an adult responsible for managing her finances.
    I just don’t get it …
    If I had a child I did not trust I would have it set up to go into a fund with a trustee, and put parameters around the use of it …
    but not to do it at the cut-off age of 18
    with the way America is going ?????
    And for arguments sake I will tell you that I do not listen to Life Insurance salesman, and I agree that whole life is generally a rip-off for financially sound individuals and families,
    but calculating for term life including your net worth on an annual basis for children up to 23 to 25, enough time to at least get a bachelor’s unless you are a super-human academic machine, and find your path in life and livelihood seems a reasonable thing to do …
    I said my peace/piece … that is all

  40. Peter says:

    One thing I noticed, that none of the insurance discussions takes into account the fact that your children will receive something from the government, either social security or workman’s comp (depending how you died). While not a boatload of income, it certainly should help with day to day expenses and can be counted on for at least the near term and for some level of support out to college.

    I also have a problem with the amount of insurance suggested. The idea is to pay off debt, and allow for replacement of income. If you have no debt (e.g. the house is paid off), then the income required should be less.

    In Trent’s example, 1.6 Million should provide, at 4% (actually earning 7% and reinvesting 3% to keep up with inflation), a continual income of 64,000 dollars a year, which is 28% more than the example salary of 50K! Do you really want to make yourself worth more dead than alive? With two kids adding to $1000 dollars a month in SS you’re talking $76,000 dollars, a 51% instant raise for knocking you off :-)!

    Given that over 30% of the examples current income (SS and Medicare (7.4%), 15% towards retirement, assuming 15% towards mortgage payment, and a couple of percentage points towards other debt) you are trying to replace is no longer necessary, you should only need something like 70% or less of the original salary to ensure “income replacement”. Again using the “don’t touch the principle” method of 4%, you’d need $35,000 per year for real income replacement, amounting to $875,000 of insurance, plus what it took to pay off the debt, say $225,000, leaving you with $1.1 Million, or half a million less in necessary issurance (about a 30% reduction).

    If you chose to factor in SS benefits to the children, in my example (possibly a bad one, you’d need to check your statement for a real number) of $12K a year, then the number drops further to $800,000, or half of the original estimate!

    Finally, if you are willing to touch the principle over this time, even taking some reasonable public college into account, you can drive that number lower, and still feel comfortable that you are leaving your family covered. And this is before you eliminate all your debt and have significantly built your net worth.

    All of this excludes other family members (parents, grandparents, etc.) and the support and help they may be able and willing to provide. My point is to use life insurance as a tool for helping your family in the event of your death. Not to provide them the equivalent of winning the lottery.

  41. Jim says:

    I would say that the post makes sense for the average individual who’s not concerned about estate taxes and who doesn’t own their own business (that could reasonably be expected to continue past their lifetime). Life insurance policies besides term policies do have their place, but usually only in estate or tax planning situations that require some real professional analysis. However, a blanket statement that term is the only way to go would be either incomplete or ignorant of tax regulations.

  42. susan says:

    Life insurance is a cushion of money to help your loved ones left behind pay the bills and carry out day to day necessities while they are mourning!
    None of the posters have remarked on what happens after someone dies an untimely death-the sadness, the needed time off from work, or the extra help needed if one has small kids…and the whole age 18 thing being the magic number of fiscal resopnsibility is ridiculous. 18 is NOT an adult age!
    As a parent, I would like to help my children go to college and start their professional lives off without too much debt.I also hope they will both find a life partner one day, and have children-and as the Mom, I would love to be able to contribute to those events in their lives! Imagine if half your income went away today-could you survive? Thrive? Provide for your kids-not just until the turn 18-but could you enhance their life choices with gifts in the future?

    Sadly,I speak from experience regarding life insurance.

    My wonderful hubby died this past year at the age of 42. We carried 8 times his salary.
    I cannot emphasize how much the money involed took away the stress of dealing with paying for his funeral and any possible financial problems/paying bills, etc.
    It allowed us a cushion of TIME-something much more valuable than $$$$-to grieve and mourn.
    We will be sad for a long, long time, but having that insurance money made the difference between picking up the pieces and making a new normal for us OR having to deal with moving to a different place( like from house to apt)or any other myriad of problems that could have risen when the other half of the family income suddenly stops.
    Buy the term insurance. You really have NO control over your life expectancy, no matter what the experts say. It’s more than just a way to pay for the funeral. It’s peace of mind for those left behind.

  43. Liz says:

    No widow ever said to the insurance agent, “Oh that is too much money, I don’t need it all.”

  44. Dennis Domingo says:

    Has anyone considered getting additional disability insurance? I had some financial planning sessions with an American Express financial planner. He suggested that I get more disability insurance because the probability of getting disabled were far greater than dieing unexpectedly. Sure you get disability insurance from your employer, but it doesn’t cover your full salary. The additional disability insurance would help cover that gap

  45. Paul says:

    Life insurance is just a way of hedging your bets. Same for disability insurance, cancer insurance, “what if I stub my toe insurance” …

    How much you want to hedge is up to you. If you are reading this post, then you are already putting a lot of thought into this. Go with your gut feeling.. because all we are talking about is a hedged bet.

    p.s. I’m only talking about term life here, whole life is a waste of money for the reasons described above.

  46. Beth says:

    Hi, I just wanted to let you know this article was very helpful for my husband and I when we started looking into life insurance. I’ve written a post on that on my own blog and have linked back here for my readers to use as a reference.

    Thank you for the help.

  47. Byron Udell says:

    That is a very interesting way to calculate your needs. Thanks for sharing this information.

  48. Tim says:

    What I have always found curious is that the wealthy people I know have permanent life insurance (whole life or universal). Supposedly they use this (and a good estate planning attorney) as a way to reduce and fund any estate tax liability their estates may have.

    Far too complex for me to understand, and probably outside the scope of this blog as well.

  49. David says:

    Maybe after your friend has been an actuary for a while, he’ll change his mind. I know an actuary who recommends the exact opposite and for similar reasons: life insurance has good profit margins, if you are the insurance company.

    Most term policies don’t pay a claim making them quite profitable. Many large, well respected insurers (no name calling here) even bank on a certain percentage of their term policies either lapsing due to non-payment or due to non-renewal and expiration of the term, and they are consistently correct.

    As for being financially reckless, the only financially reckless people I know invest in risky mutual funds hoping for a “get rich quick” scenario – investments that they don’t fully understand made up of companies that they have not fully researched being run by a professional who does not have a stake in the investments (and thus no built in incentive) in the fund.

    Some of the most successful people I personally know own a lot of cash value insurance. It’s conservative (like them). And the general portfolio gives a great deal of insight as to what the 100+ year old insurance company invests in to stay alive during good times and bad. These people are just following suit, not trying to re-invent the wheel with the next “hot” investment product.

    Of course, these folks also invest in real estate, but that’s another blog entry methinx.

  50. Anisa says:

    Please help us with a difficult decision. My husband and I have been “advised” to purchase several whole life policies over the course of the last 20 years amounting to over $400/mo. We now realize that those policies were probably not the best for us in the long run, but here we sit. We could cash out and get around 18k. My husband’s primary argument is that we’d lose so much money by cashing out now instead of waiting til the “break even” mark years down the line. My view is to cut our losses now, get a term policy and invest/save the difference in premiums on our own. I think we’d still come out ahead in the long run. Please help us make this decision!!

  51. RCE says:

    I disagree with a number of your points here, but the idea that someone should “never buy anything except term insurance” is particularly disturbing. I am in the process of writing a series of posts on my blog debunking the “Buy Term and Invest the Difference” myth.

  52. Question. says:

    Trent,
    Given the market today would you reconsider whole life insurance as a secure asset class?
    If you had invested some money in WL insurance would that same cash value had gone down like every other investment these days?

  53. william says:

    hi,
    can u give me detailed explanation about all types of life insurances and i want to know the different
    between life insurance and other insurance.from your article i get lot of information its vry useful for me,thanks

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