March 6th, 2006 | 
Author: 
Few questions about term life insurance:
I am 24 married with a mortgage, and 2 kids.
First the amount of insurance:
I have been told two different ways to look at this:
a)buy as much insurance now as I can because it will be cheaper when you are young and can “grow into it.” When Im older and need more insurance the rates my be higher to purchase a higher amount.
b) buy just what you may need to pay off mtg and put the kids through school. With the thinking that it will be cheaper and put more money in my pocket now, and my needs will change over time and later I can get a great amount of insurance later if needed.
Then the duration:
I have heard just buy 10 year as it is cheaper now and rates will decrease with time and your needs will change, and I dont want to be locked into a higher rate. But what if I am in worse health 10 years from now and the rates are higher?
But others say buy 30 years because you will have the certainty of having the same rate for 30 years.
Thanks
Ashleigh Garofano
Posted in Insurance | 
Tags: 10 Years, Buy Insurance, Duration, Health, Insurance, Insurance Rates, Money In My Pocket, Mortgage, Term Insurance, Term Life Insurance, Two Different Ways
Valid questions, and a good insurance agent with a financial planning background should be able to break down the costs and benefits clearly.
While you’re influencers are right on multiple fronts, there are a few easy considerations.
Rates are lower now at your age, and that is because Insurance Companies have extensive amounts of data on the low likelihood you will die during the term of your insurance. This is not to say don’t insure, you need to protect your family, but don’t overspend now. Consider liquidity, current savings, present and near term future earnings. Using this information, determine how your “cash” position will change during the next 10 years. If you see your situation improving, then with each year of your term insurance you’ll actually need less as the mortgage is paid off, your savings increases and your annual earnings grows.
It’s a long answer and certainly depends on individual circumstances, but if you’re accepting input, here is mine.
Take out a 10 term policy that will cover your mortgage and two to three years of projected living expenses for your family.
Stay in good health, and then at 34 take another 10 year policy with the same considerations.
Then, sit back, relax and enjoy your family knowing they are covered and you’ve got a long life ahead.
I deal with this situtation on a daily basis.
you’re approaching the problem from the wrong angle. term insurance is a temporary need, needed until you are in a position to do without. (ie, you have lots of money to pay for everything you will every hope to have and do)
Start with term 30 (your working life)
1. make a list of everything that you want to do during the next thirty years that will cost money. (major things like, pay for the kids school, travel to europe for vacation, pay the mortgage, retire early, pay for kids wedding, buy a present for parents, pay for childcare, daycare)
2. add up all your monthly expenses that you and your wife share.
3. pretend that one of you died tomorrow. what would happen to income & expenses? if you went, could your wife earn enough to pay bills and maintain all the standard of living that your fam has gotten used to? will they still be able to accomplish everything listed in #1?? if your wife went, could you cover all these things?
4. most young couples typically need 500000-1million dollars worth of insurance, less as time goes on. keep in mind term insurance can be cancelled at any time, all you do is stop paying the mothly premium.
What do you want the insurance to do for you? This is the first and foremost question that needs to be answered.
Do you want ALL consumer debt paid? If so, add up what you have now and put that on top, but make two columns.
What is your present income? How long do you want your family taken care of, should the worst happen? For the next ten years, fifteen, twenty? How young is your youngest? Perhaps, you want to take care of your family until the youngest is out of college.
Mortgage? Do you want it paid off? Now, go back to income. If all debt AND mortgage is paid off, how much will your family need? Figure both amounts for income- with and without mortgage paid.
Do you want to be sure that your children’s education is paid for? Do you want figures for public or private college( public- 10-12k per year and private- 20-30k per year)?
Income replacement should be about 10-15 times yearly salary. Make sure the term length could be customized, meaning that as each milestone is hit, your face amount will drop, and so will premiums. Be sure you can band your family onto ONE policy. If you do it any other way, the agent and company make out- $75 per policy, usually. For your family, most companies will issue separate policies which equals $300 for your family.
Your length of coverage should be as long as you need. Answer the questions above, and you’ll have a better awareness of the length. I would say no less than a 20 year policy and no more than a thirty. If you follow the first answer, after each ten year term, you will pay a higher premium. Get a 20-30 year level term policy. This means that you pay the same amount from the first year all the way through the 30th year.
Email if you need any further assistance.
Question #1:
Go with (b). Answer (a) is just trying to talk you into buying something you don’t need.
Yes, if you need more insurance in the future, and you are older, it MIGHT cost more at that time. However, this is the same logic as buying two cars now because prices will be higher in eight years. You are buying something that you don’t need, and you are incurring a cost (depreciation) of something you aren’t going to use.
The odds that the price increase would be enough to offset buying insurance you don’t need is slim – it would basically require your health to deteriorate significantly.
I’m a cheapskate – I never buy stuff (including insurance) that I don’t need.
Question #2 is more difficult and more arguable. Personally, I say go with 10-year term, but there are those who disagree with me. It is true that you are taking a risk that your health could deteriorate and you could become uninsurable, but today’s 10-year term plans have contingencies for that:
1) You can continue the policy, but at a (much) higher premium.
2) You can convert the policy to whole life.
Both of these are expensive options. However, the odds that you become uninsurable in 10 years is very small, especially at your age. So ask yourself, if I absolutely had to pay the higher rate in 10 years, could I do it? If the answer is yes, you don’t need a longer term – you can afford to become uninsurable. You insure against events you can’t afford, not those you can. If the answer is no, consider a longer term.
Insuring against being uninsurable is an expensive option, especially considering how rare an event it really is. Look at these numbers (from Ameritas Direct for a $1M Male, Non-Smoking, Preferred policy):
At age 25, a 10 year term policy is $370/yr
At age 35, a 10 year term policy is $370/yr (that’s right, no change)
At age 45, a 10 year term policy is $820/yr
At age 25, a 30 year term policy is $1040/yr
The benefit you get from the 30 year term is insuring against being uninsurable. But this option costs twice as much over the 30 year term! Also, you would expect the 30-year term policy to be cheaper in the last 10 years, but it isn’t.
Also, keep in mind that you may ditch your policy before the 10 years are up. What if you find a cheaper policy? You switch, of course! If you do that on a 30-year term, the extra premium you paid to lock in being insurable 25-30 years out is completely wasted!
–>Adam
You are getting lots to consider with the answers so far. None of them are wrong. You have to look at what your situation, why you need life insurance, and how you feel about it.
Life insurance is for protection from loss of the income earning potential of an individual. You should consider what you want covered including the following: debt, income for survivors(amount/mo. x years needed), mortgage, education and final expenses. That should give you the amount and should be right unless you are still a growing family.
The duration should be the longest time you may need the protection, probably your mortgage term.
There has been some disagreement in the term length vs cost. I understand that 10 yr. term lengths are the cheepest. The one thing you cannot control is life that will happen during that 10 years. Even if you eat right, exercise, and get enough sleep. You may still get sick, or in an accident that may affect the cost after the 10 year term is up. Some unfortunate folks are uninsurable due to some event that happened in that 10 yr. term.
The longer term locks the LOWER amount for a longer time and protects the family for the duration that protection is needed.
All insurance is protection from loss. Protect your family to the extent and time needed now. You buy insurance for the future, insure your family for the future.
Variables that may be considered. Some companies will put riders for different terms onto the policy. For instance: Debt $28000 to pay off in 15 years, Mortgage $140000 pay off 29 yrs, Education $64000 needed for 22 years, Income replacement $1500/mo for 10 yrs.
The policy would look like follows:
$140000 face amt 30 yr term.
$64000 face amt 25 yr term
$28000 face amt 20 yr term
$180000 face amt 10 yr term (income)
$412000 total face amount
In this situation, as terms expire, they simply fade away, so does the cost associated, just as the responsibilities have evened out.
Keep one thing in mind. Most policies allow the policy owner to reduce coverage in the term. If you have 500000 30 year term, and needs have changed, reduce the policy to, say 265000 and reduce the costs by that proportional amount.
I don’t know if I have confused or helped you. Hopefully helped though.
From my personal perspective in my family. I would have hit preferred rates, but I went for standard rates which was more expensive. My thougth was that I wanted to make SURE that my family was protected in case I was gone. I found out later I would have qualified for lower cost, but I wanted the assurance that my family had protection.
I had a brother who had cancer at age 23, he couldn’t get life insurance after that. He died at age 41, left wife and daughter in LA, with no life insurance.
The cost of $500000, at 30 yr term, preferred nontobacco would be around $ 50/mo or so, Tobacco around $100/mo. For peace of mind that is cheap in either case.
Protecting my family is important. You are doing the right thing.
Good luck to you.
Your financial future 4will bring lots of changes and challenges. Insurance covers the expensive unexpected events and can make up for a lack of savings.
Without knowing more about your individual situation (income, savings, total debts, expenses, and most importantly YOUR GOALS), no one can tell you what is the best insurance for you.
Do you plan to stay in your current house until you die or will you trade up several times? Will your income grow? Will your savings grow? Do you have any risky hobbies (skydiving) or a risky job (demolition expert)?
What will your savings be at each point in your life?
I suggest that you meet with a professional planner and map out a strategy for your life – a financial game plan. This will include not only insurance (life AND disability) but also a savings strategy (how much of each paycheck can you save and how to invest those savings). Plan on reviewing this game plan regularly (NFL coaches review their plans and make adjustments at halftime).
Keep in mind that you CAN own multiple policies.
Good Luck and thanks for planning ahead.
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Your need for insurance will change but never go away, a simple answer is buy permanent insurance, the death benefit will continue to grow and it will have a usable cash value, make sure you get it from a great company though. There is one issue with that though, it’s expensive, if you are just starting out and don’t have a lot of extra money laying around to put towards it but plan on having an increase in income later on, buy a good term 80 policy Northwestern mutual offers a very competitive term 80 which lasts until you are 80 and you can convert it to permanent at any time along the way.
What you should be thinking is “What can I do to build wealth so that I don’t need to purchase life insurance anymore?”
If I was in your situation, I would buy a 30 year term. I don’t know your financial situation, but financial experts you should get coverage of 8-10 times your current annual income. If you make $40k/year, you need $400,000 coverage. For a 24 year old, it may cost you around $35-$40/month, which isn’t much if you compare it to whole life or universal life insurance.
Next, you should highly consider investing into mutual funds that are inside a Roth IRA. The average rate of return on them has been around 12% in the past 25 years. If you put away $200/month, you can potentially have about $706k in 30 years. Remember, you are not going to get 12% every year because the stock market constantly fluctuates, but on the long term, you can potentially get an average rate of 12%. In 30 years, you will be 54. I don’t know what age you plan to retire, but lets say you retire at age 60. When you are 60, you can potentially have $1.4 million.