Life Insurance Questions

[Kimberland30]

I did a search and didn't find anything, so Mods, if a thread exists please let me know and delete this one. Thanks!

Is there a formula for determining how much life insurance a person needs?

I am 36 years old, DH is 38. We are both smokers (I smoke cigarettes, he smokes cigars at least weekly so he is considered to be a nicotine user). We own our home and are in the process of refinancing our mortage, fixed rate for 30 years. We don't owe anything for our boat or my car. DH still has 2 years left of payments on his SUV (we owe less than $13,000).

I have 2 kids from a previous marriage. One is 15 and lives with his father and step family, my DD is 17 and will be starting college this year.

DH makes approximately $20K more per year than I do. I put 10% of my pay into a 401k account (5% company match), DH has a profit sharing account that he can't contribute to.

Right now I am insured for $250k through work, and $100k through our credit union. I pay about $20 per month for these two policies. I also have a policy on DH for $25,000 - the max I could get through work. I know this isn't nearly enough, so I'm wondering if there is a way to figure out how much life insurance we should each have, just in case one of us were to pass on.

Thanks!

[jajacobsen]

Most people say "enough so that the surviving spouse can maintain their standard of living."

So it really depends.

In the situation of a stay at home spouse, usually enough so that if invested wisely, the income stream of the deceased spouse could be maintained, or the home coudl be maintained.

So if a SAHW had three young kids, then probably $1m on both the husband and wife. If te husband dies, the wife coudl life on teh earnings and still take care of the kids. If te wife died, the husband could either SAH or hire a housekeeper/nanny to taake care of the kids.

However, DH and I don't have any kids and both earn a good living. However, either of us would struggle to maintain the same standard of living with our mortgage. And we wouldn't want the surviving spouse to have to move. So we just have enough to cover the mortgage in full plus a little extra as cushion.

I think you fall closer to the latter example.

[mamax2]

I agree with jajacobsen, except I'd probably factor in the cost of college/post-graduate education for both of your children. Life insurance isn't just about your spouse - you would want to make sure your kids are well-provided for especially since your current spouse is not their biological father.

We have young kids so our formula encompasses paying off our mortgage, vehicle(s) and providing for education/supervision of our children, plus several years of 'float'.

While you're at it, write a will if you haven't done so already!

[Kimberland30]

Most people say "enough so that the surviving spouse can maintain their standard of living."

I've told my husband that we should insure him enough so that me and my future 25 year old boyfriend could travel the world. :p



=mamax2] We have young kids so our formula encompasses paying off our mortgage, vehicle(s) and providing for education/supervision of our children, plus several years of 'float'.

While you're at it, write a will if you haven't done so already!

By using your example, we are looking at at least $500k for DH. That would be enough to pay off the house, sending the kids through college (even with their 529 accounts), and some float for me. I haven't considered in SS benefits for a dying spouse/parent, and am not sure if that is even something to figure in.

We haven't done wills yet, it's on my list. I have legal insurance through work and it won't cost us much. 2008 is our year to get our finances and future in order - or at least get done the things we should have years ago.

[jimmysgirl424]

I used a life insurance calculator to figure it out. Well, actually several of them just to see what different ones would come up with. :o Anyway:

http://www.bygpub.com/finance/LifeInsCalc.htm

http://moneycentral.msn.com/investor/calcs/n_life/main.asp

http://www.forbes.com/tools/calculator/life_insurance.jhtml

HTH!

ETA: DH and I want enough insurance to pay off all debt and put our DD through college, we don't want either of us to have to worry. Based on that, we are purchasing at least 1M on DH and half a million on myself.

[Mindy3094]

We had our financial advisor do it for us. He used two different methods to figure it out and the numbers were pretty close to each other.

I know I was *shocked* to see what he recommended for both of us. But, we own our own business and apparently it's not uncommon for small business owners to need $2-5million in life insurance. Nuts! When I sat down and thought about it though and actually ran some numbers, I realized he is right.

I'm glad we did it though. I knew we didn't have enough but I had no idea we'd need that much.

[villanelle75]

Do keep in mind that depending on how a financial adviser is paid, s/he may very much have a vested interest in selling you as much as possible so I would take the recommendation of a commission based adviser with a very healthy dose of skepticism.

Online calculators told us we needed much less than our adviser said we did. I started a thread about it a while ago (maybe a year?) and someone posted a very basic formula which seemed to give us a number much more in line with what my gut was telling me. With no kids, our needs are much less than many other's.

[laura]

Ours will be enough to pay off our mortgage + "some" for each of us. Without the burden of a mortgage, our overall expenses will be significantly reduced. No kids, so no college concerns just yet. I don't view life insurance the way a lot of those online calculators do, though. The death of my spouse would likely cause me to re-evaluate a lot of things in my life. With enough to pay off our mortgage, I would have the freedom to stay in our home, or not (e.g. sell it and live off that money, or use that money to move, etc). To me it is a safety net, not a nest egg (for lack of a better term).

[jajacobsen]

Villanelle - i kind of agree. My "formula" comes from what my parents taught me and my own judgment. Insurance policies can be quite expensive annually and while in many cases it would be a good idea, soem families simply do nto have $5k a year for those types of policies.

The cheapest insurance is usually term insurance, often purchased through an employer with a group rate. Additionally, companies like AFLAC offer supplemental insurance, or in the case of my husband, his only life insurance because his employer does not offer a group plan.

In the example for Kimberland30, I don't knwo if $500k is needed. If they can swing that, great, but she might be shocked at the premiums for a smoker. I would argue all that is NEEDED is enough to keep her from holding the bag on the mortgage, and any other joint consumer debt. Whiel providing for thw childrens' education might be nice, they do have a father (her ex) who can also help with that expense, and apparently, 529 accounts.

mamaX2's approach works, but it can get very costly. As she and her husband age - and the premiums may get higher - but conversely her hoem equity and the savings for the childrens' education also grows, they may choose to scale back on the amounts

[chaichaitea]

Suze Orman had an interesting column about this recently in Oprah magazine--and she estimated that you would need 20 times your loved ones' annual needs. Her specific advice is outlined here: http://www.oprah.com/omagazine/200801/omag_200801_suze.jhtml

I love Suze Orman!

[mamax2]

mamaX2's approach works, but it can get very costly. As she and her husband age - and the premiums may get higher - but conversely her hoem equity and the savings for the childrens' education also grows, they may choose to scale back on the amounts

You're right, it's not cheap! We consider it a necessary evil ;) I should also mention that we have Term Life and that we 'locked in' early - with physicals in our mid-20s (neither of us smoke either).

In the OP's case, I definitely wouldn't advocate carrying the amount of insurance DH & I have. Her age and health status alone would make it exponentially more expensive.

I still think mortgage and education expenses are reasonable to consider though.

[numberlady]

I have typically heard 10% of the person's annual income. I <3 Suze Orman, but 20% seems pretty high. I guess there could be circumstances that would warrant that amount, but it doesn't sound like you need that much.

[AlisonCO]

A couple of things (coming from the wife of a very ethical and fair financial advisor):

-as far as I know anyone that sells insuance is compensated thru commission (this is different that other types of investing where some people are paid by others types of fees) - a good FA will give you a range of insurance quotes and you can decide what you feel comfortable with/what you can afford. It is their job to present you with the worst case scenario and to help you plan for that.

-if you buy a policy and quit smoking, you can reevaluate after 12 months and your premiums will go down. I am sure that you know this, but smoking is bad bad bad when it comes to life insurance!

-Suze Orman is not a financial advisor and is not current on her certifications - she is a journalist.

-if you would like the name of the national company DH works for, pm me - they have been rated #1 in customer service/investor satisfaction by JD Powers for 3 years. To get a quote is absolutely free.

[Kimberland30]

We are not using a FA for insurance. One quote we received was from our credit union - but to be eligible we have to keep an account open there. This is no problem if we end up going with them. The other policy is through our new bank. I got rates for $250k up to $500k and received some really great advise from the woman I spoke with.

Because my husband quit smoking a year ago and occassionally smokes cigars, they have an underwriter that considers him a non-smoker. If and when I quit smoking, I can get a new quote after 12 months as a non-smoker.

This afternoon I thought about the 529 accounts and my ex-husbands participation in helping to pay for our children's education. Plus our kid's can get student loans and the like.

I think at this point we'll go with $300k - which would be enough to pay off the house and any outstanding debt that we have now, plus leave some in the bank for later. I agree with Laura that it's a safety net...not retirement! :)

We are probably going to keep my insurance where it is through work and the credit union. For a $100k policy through the CU, I pay only $14.00 per month, as a smoker. I bought the policy oer 8 years ago and that made all the difference. Term Life quotes can't touch that one.

I'll have to check the CU rates for DH though. Either way, as our life situations change (pay down the house, head into retirement, etc), we'll re-evaluate where we are and go from there.

Thank you so much everyone!

[twainny]

Kimberland - You may also want to consider the company that is backing the plan via the CU. Not all companies are all that great. Some don't pay out even when you die. I was working in the Life Insurance field after 9/11 and I believe that some companies didn't pay out the life insurance on people who were killed, because the company deemed it "an act of war". Other companies paid out BEFORE they received death certificates.

I know you are a smoker, so you will probably benefit from a group policy. But I believe that if there are people out there who are not smokers, you can usually get a better, cheaper policy from someone other than your employer. Plus, you can't take an employer-sponsored policy with you, so, to me, it makes sense to buy a policy with a broker.

As for your husband, if you smoke 12 cigars a year you are considered a smoker. I *believe* that if he doesn't smoke for 30 days, the test shouldn't be able to detect the nicotine.

I worked for a guy who sold insurance policy in excess of $50 MILLION on people. But basically his commission was about equal to the 1st years premium (I think it was about 10% less really).

[Hattie]

I must have met the most reluctant insurance agent in the world. I used an online calculator to see what would be ideal for my dependent and the insurance agent told me I only needed half of that. At the time it was equivalent to 5 years salary.

Is that right? Or was he trying to lock me in at a young age with low coverage so he could swoop in later to say I need more when I got older (and would have higher rates).

[Mindy3094]

Do keep in mind that depending on how a financial adviser is paid, s/he may very much have a vested interest in selling you as much as possible so I would take the recommendation of a commission based adviser with a very healthy dose of skepticism.

Oh yes, definitely keep this in mind and don't blindly go with whatever they recommend. Also, you don't want to just go with some random advisor, but someone that you know and trust to give you the real deal.

But since you are not using one, I guess that doesn't matter. :)