How much life insurance do you need?
Dave Ramsey recommends 8-10 times your yearly income, as a rule, which is what I generally recommend as well. At least, that’s what we’ve taken out on Jeff. And for 30 years. On me? Not nearly that amount. And right now only for 10 years. We’re currently evaluating the life insurance coverage we have on me because the rate seems high and we want more than a 10 year policy. Since we’re evaluating getting a new policy anyway, we should at least think about increasing the value of the insurance. But the highest we’re considering is about 5 times my annual income.
How is insurance bought?
We believe in term life insurance – which has 2 components: value and time. The value is the amount of money you get if someone dies. $10,000. $1,500,000. Anything in between. The time is how many years the rate is guaranteed to be the same, assuming you pay the bill. 10 years. 20 years. 30 years. Generally, the larger the value of the policy and the longer the term, the higher the premium (the amount you pay each month). Looking at zanderins.com a 10-year term life insurance for $50,000 is about $7.50/month (for a woman my age) compared to $155/month for $1,500,000 for 30 years. That’s a significant difference in premiums and in payouts.
Why are husbands insured differently than wives?
They don’t have to be. You can insure anyone for any amount for any length of time. You can both have $1 million policies for 30 years if you want to pay for that. But you probably don’t need nearly that amount. So why we would insure Jeff for 10 times his income and for 30 years, but not me?
Is it because I’m worth less? Hardly. Is it because I make less? No. Is it because we can’t afford it? Nope. The major reason is: we don’t depend on my income, but we depend on his. Our budget is built around what Jeff makes; mine goes to savings or investing or to playing. I fund our wants, not our needs. Right now, if either of us were to die, all we really need is enough money to bury the other. You could do that with a really small policy. But since you buy insurance BEFORE you need it, we look to the future to say “in 5 years, what will our income needs be?” For now, we assume that within 5 years, we’ll have children. And that’s what drives our insurance needs higher.
5 years from now, if Jeff were to die, I would need to replace his income. The kids will probably like eating. I will love living under a roof. I’m a big fan of having a car to drive. I don’t need to go to Disney World every year, but I gotta wear clothes. 8-10 times his annual salary is enough for me to invest that money, live carefully, but not have to worry about running to the grocery store. I wouldn’t be living like a queen, but I wouldn’t be living at a shelter either.
5 years from now, if I were to die, Jeff wouldn’t need to replace my income. I might not even have any income to replace. BUT–Jeff will probably need to pay someone to do what I do for the family. Things like cooking meals, grocery shopping, watching the children. In the event of my death and we have young children, it would be really expensive to do those things. That’s why we have insurance on me. That insurance money isn’t replacing my income; instead it’s paying someone to do the things I did. Since we won’t have little children for 30 years, we think a 20 year policy is probably about the right time. You can never, ever replace a husband’s wife or a child’s mother. That isn’t what insurance money is trying to do. Insurance money is trying to keep basic needs met so that life can continue. So, moms, make sure you have a life insurance policy!
If we don’t end up having children or somehow have managed to save millions upon millions of dollars, then we can always replace these higher dollar, long-term insurance policies with cheaper and shorter ones. But, no one knows when they’ll die, so we have to plan on dying at some point.
How about you? Are you insured for enough?