A Few Basics re: Term Life Insurance

We get older. We get married, buy houses and have babies. As we do, the people in our lives become dependent on us.

Something that I routinely say to clients is that no one can replace a spouse or a parent, but we can at least make sure that a family is not financially devastated and that the same opportunities that would have been available will still be available.

This is where Life Insurance comes in. The best way to think about it for 95% of people is protection for the financial loss that death would cost your family...the industry term is Exposure. For most parents in the modern family where both are working, this includes income and final expenses (today's average is $10-$15K). It may also be a good idea to incorporate specific debt such as mortgage, student or business loans and any other significant lines of credit.

In a family where one partner is working and the other is the homemaker, there are still exposures to account for with both partners. The prime wage earner cannot do what they do outside of the home without the work of their partner inside the home. The standard that insurance companies use is 1/2 the coverage of the wage earner.

Let's look at an example:

Jim (30) and Sally (29) are married and they have 2 kids, 2 and 4. They own a home (with a mortgage) and they both work. Sally earns $50K Annually and Jim earns $40K, bringing their total household income to $7500/month.

For Jim and Sally, I would recommend Term Life Insurance. Their exposure is going to be large while their kids are dependent on them financially, they are still paying their mortgage and they are building for their retirement. In 20 years, their children will be nearly independent and their mortgage and retirement will be 20 years closer to where they want them to be. They will not need as much coverage then as they do now. Permanent or Whole Life Insurance will cost them substantially more for coverage that they probably will not need beyond 20 years.

In the meantime, if one of them were to pass away the family would be greatly challenged financially in addition to all of the other challenges losing them would present.

My recommendation would be for 20 Year Term Life Policies, meaning that the rates that they will pay for the coverage will be locked in for 20 Years. After that the rates re-evaluate annually based on age...meaning they get more and more costly. This option is called Guaranteed Renewability and is available until age 95...it's there to make sure you always have coverage available. Jim and Sally would not be obligated to carry the policies for any period of time and can cancel at any time. Insurance is an at-will agreement between a client and a company...as long as the premium is paid, coverage will be in force.

For the coverage amount, I would recommend $750K for each Jim and Sally. $750K represents at least 15 times each of their annual incomes as their children will be financially dependent on them for at least the next 15 years. It may also be a good idea to take more coverage for Sally because she earns 25% more income than Jim. Also, as a woman her rates are going to be less than Jim's based on mortality...they will get a better value on her coverage. I would offer Sally a quote on $1M in coverage as well.

If Jim or Sally were to pass, a good option for the family would be to annuitize the proceeds of the policy rather than take the lump sum and put it in the bank. An annuity would offer higher growth percentages than a savings account and can be structured so that they would not experience loss in an economic climate like we have now.

Conservatively, if a family were to stretch payments out for 20 years the annuity would pay out 130% of the initial deposit amount.

If they each took $750K in coverage and one was to pass, the annuity payment would be about $48K annually or $4K/mo. Paid out over 20 years the total would be $960K. Sally's current income breaks down to $4150/mo. The annuity payment would come very close to supplementing what she brings in as the prime wage earner, were she to pass.

To be conservative, let's quote them in the Preferred Rate Class, Non-Tobacco which is representative of the 75th-90th percentile of best health in America. Here are the quotes:

Jim's $750K/20Year Policy - $43/mo
Sally's $750K/20Year Policy - $32/mo
Sally's $1M/20Year Policy - $40/mo

Now let's look at another scenario. Say that Jim is the prime wage earner and Sally works in the home. He brings in $80K annually. Because his passing would have a greater affect financially than the scenario above, we would take a few other items into account. To factor his coverage amount, we would first look at replacing his income. I would recommend $1.5M in coverage which would represent almost 19 times his (and the household's) annual income. This way things can continue as they are, while the kids are dependent on Sally in the home and she will not be pressed to enter the workforce. It may also be a good idea incorporate their mortgage and any college funding they would wish to set aside for their kids. I would offer Jim a quote for $2M in coverage as well.

As the homemaker, 1/2 of Jim's $1.5M or $2M policy may be a little more coverage than they actually need for Sally. For her exposure we would want to account for the time that Jim would miss from work in bereavement with his family as well as child care costs when he returns to work. I would recommend looking at $250K and $500K in coverage.

I always recommend clients to take coverage of at least $250K...the price per unit of coverage is much better at and above $250K. It's not uncommon that $250K can actually cost less than $200K.

Jim's $1.5M/20Year Policy - $75/mo
Jim's $2M/20Year Policy - $100/mo
Sally's $250K/20Year Policy - $14/mo
Sally's $500K/20Year Policy - $22/mo...50% more premium for 100% more coverage

In both scenarios, substantial Life Insurance coverage is available for Jim, Sally and their family for about the cost of a coffee drink/day...the costliest is $4/day.

All of the companies I've based the above quotes on are the best financial services companies in the world. The policies require a brief medical exam that usually takes place in the client's home...it involves blood and urine samples and measurement of height, weight and blood pressure. There are policies available without medical exam as well, at higher premium cost and capped at $500K in coverage.

Any questions, I am always available at fmcintosh@termsafe.com and quotes are available here.

I Appreciate Your Time,

Floyd