This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Monday, March 24, 2008

How much life insurance do we need?

Posted by Matt

Every once in a while I'll stumble upon the topic of life insurance in a personal finance article or book and have a moment of panic when I realize that I carry way less than what the publication recommends. I read one "rule of thumb" that indicated that I should carry life insurance coverage equal to ten times my income. Another said I should have enough to pay off our entire house mortgage and all expected college and marriage costs for all children. Wow. Maybe insurance agents are writing these articles. Sounds like the authors want my heirs to essentially win the lottery if I die.

But how much do we really need? Well, my employer recently sent out an announcement about some new policy options, so I decided to dig into that question. The easiest decision was to choose what is known as "term life insurance", mainly because I've never read anything compelling about any of the other types of insurance. Some insurance options, for example, include an investing component, but I'll do my investing elsewhere, thanks.

I already get term coverage equal to 2.5 times my salary for free, sponsored by my employer. That used to seem like a fair amount of money, but now that we have a son and have settled into a house that we want to stay in, my wife and I decided that it would be a good idea to at least cover the mortgage.

The good news is that the additional coverage is not very expensive, which surprised me. Each additional unit of annual salary that I add only costs around $5/month. Adding more than one unit requires a physical exam, so I decided to only add one (call me lazy, but I just had a physical two months ago). That brings me up to 3.5 times my annual salary in coverage ON TOP of what I have in my retirement and savings accounts.

With funeral costs and the mortgage covered, my family should be able to get by with even modest income, so I'm pretty happy with this strategy. It might not be available for everyone, so I wanted to share one final point about providing for those left behind: the best "insurance" I can provide is being financially responsible while I'm still alive. I spend less than I make so that I can build up savings and won't leave behind a burdensome debt. Once we eventually pay the mortgage off, I shouldn't need life insurance at all!


term life insurance said...

Definitely you are right, I had the same skeptic view about the insurance policies and in some terms I do still have however I`ve already bought one. The thing is that you are burdened with the different paraphrases and cliches why an individual needs a life insurance plan. One of the most frequent answers is to take care of your family providing financial secure which sounds undoubtedly convincing, but what I want to point out that you can do so by finding another solution. Despite of that I`ve bought an insurance policy as I`ve found this Life insurance tips website with objective explanations. Even that I have the plan I don`t forget that its not "everything".

Paul said...

So did you get your additional life insurance through your work or through some independent insurance company?

Matt said...

Sorry if I left that vague. I took advantage of the offer through my employer.

Peter Paul said...

It is essential that a particular level of income should be maintained for the family even when its breadwinner is not around. Suppose a family's present needs are Rs 25,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family's monthly expenses of Rs 25,000.

life insurance

Peter Paul said...

The good news is that the additional coverage is not very expensive, which surprised me. Each additional unit of annual salary that I add only costs around $5/month. Thanks for sharing such a good piece of info.

term plan calculator