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moneysense.ca, 8/11/06
Life Insurance: How Much?
Current issue:
As I noted in yesterday’s post, my wife and I purchased term life insurance for each of us as soon as our kids were born. Some of the comments I received inspired me to write this post.
One commenter mentioned that he has life insurance through work but I don’t think it will provide nearly enough coverage. How much life insurance do you need? This article by Prof. Milevsky should help you arrive at a reasonable number. You can get quotes for term life insurance from the Term4Sale website. Also, don’t forget to buy life insurance if you have a stay-at-home spouse who is caring for very young children.
Another commenter asked about getting life insurance for children. We do not have any coverage for our children because there is no one financially dependent on them. In the same vein, we did not purchase life insurance before the children were born because we were both working and could have managed with the “free” coverage from work should anything happen to either of us.
moneysense.ca, 8/11/06
Life insurance for children makes little sense! Besides being a very morbid idea, it is not the purpose for insurance.
Insurance’s purpose is to protect earning power. Some may debate that your ability to earn money is your biggest asset. Thus, the rationale to insure the source that feeds your other assets that you insure (house, car, mortgage etc)
Whatever amount you think is suitable in today’s numbers will be a pittance when your children are grown up and actually have their earning power? Don’t believe me? If you have parents who bought life insurance on you, ask them what the face value of the policy is, by the time you’re in your 30s, 40s. That face value is barely enough.
Your need for insurance will decrease with age as you have less debt, increased net worth and your children earn their keep (if they’ve already moved out of the house). Insurance for kids just don’t make sense. The people that truly benefit are the insurance companies that get to compound your premiums for 18, 20 years.
Most people with kids are grossly underinsured because they fail to factor in things like inflation, the increased taxation stemming from higher tax brackets when only one parent remains earning all the income (from insurance proceeds + their regular income), and the fact that very few expenses really go down (sure you may only need one car, but the house still needs to be as warm, property taxes are the same, etc).
WHAT KIND? – If you have a mortgage or haven’t yet maximized your RSP, you should never buy anything except 10 year term insurance – but you should buy a lot of it. (You should also only buy insurance that is renewable and convertible. Look for R&C on the quote and ask if unsure.) Only the very wealthy should look at whole life, universal life, etc. as it can make sense for capital gains tax planning in the right circumstances.
HOW MUCH? – I would say buy 20X (yes, 20X) your income if you have young children…because that amount, earning at the current five-year bond rate of, say, 5% will replace 100% (20 x 5% = 100%)your current income…but the extra ongoing income tax tax that results from the earnings of this amount will offset the reduced expenses of the deceased not being alive anymore, and inflation will erode the principal over 20 years or so. If you have teenagers, you can probably look at 10X your income, but 13X-14X is probably safer.
WHAT ABOUT OTHER COVERAGE? – Next, discount any accidental death coverage to zero – this type of insurance is useless. First, while easier to imagine one being victim to an accident than seeing oneself simply become ill, accidental deaths are statistically very rare. Second, they are hard to prove and you may have to wait a year or two before a coroners report is released confirming the cause of death is accidental. (not like the speed at which Quincy would work). Third and most important – you don’t need any more coverage if you die by accident. Buy insurance that pays no matter how you die.
Also, mortgage insurance at the bank is a bad option because you have to re-qualify everytime you renegotiate rates and terms, or switch banks, or blend-and-extend, etc. Almost everyone becomes uninsurable at some point in their lives so say no to the bank, and get your coverage privately so it is portable.
SUMMARY – If you have ever seen someone die and leave their family without enough insurance, it is pretty sad what can happen. Kids lose a parent and the other parent has to work more instead of less right when kids need time and support the most. You see people have to move and children have to adjust to a new school, new friends, etc. All that has a real cost despite being hard to quantify. On the other hand, if you have seen people die and leave their family enough coverage, the power of having financial security allows people to focus strictly on getting over the loss….it really is amazing stuff.
I hate insurance companies – think they are all b*stards – and hate paying my premiums each year but, that said, I will always have a truckload of coverage of my life.
The way I look at it is. You insure your assets and not your liabilities. Kids are liabilities so don’t insure them. While we’re on insurance topic Universal Life insurance is also a scam if you ask me. Do your home work before you buy UL.
I can’t quite recall what it is called but we do have a type of insurance on our kids. It is very minimal, basically it will pay us about 15k if either one dies.
Why would we do this you ask? Well, personally the last thing I want to worry about if something were to ever happen to one of my children is how I am going to pay for the funeral. Basically this insurance gives us enough money so that we will not have to take on debt in order to give our children a proper burial, and the cost is very minimal. I can’t remember off the top of my head but it was like $3 a month or something. It is attached to our 10 year renewable term insurance, so after 20 years we could drop it.
Anyways, just thought I would throw that out there to see if anyone has any opinions on this.
I would suggest purcahsing life insurance once you decide to start trying to have children. When your wife gets pregnant nine months is a long time and something could happen to you before the child is born.
rab
Rob: Thanks for the detailed comment. I totally agree that it is imperative to get enough coverage.
I don’t understand why you would not want to insure your children. Sure it may not make much sense financially, but emotionally it may take somone years to recover from a blow like that. Each person reacts differently. I believe children should be insured at a rate (like Ryan above has) of funeral costs + 1 year of primary caregiver salary.
This will allow for the funeral to be proper, and people to take time off of work to recover and get their bearings again.
Knowing that if a child dies and you will be taken care of and have the ability to grieve at your own pace rather than returning to work after the 3 day berievement is well worth the minimal cost in my book.
Holy moly, everybody’s opinions are all over the board! I took a life insurance course but I didn’t complete it because my prospective employer is obviously out to oversell insurance to people and yada yada yada… Anyways, my opinion is very similar to Post #1 from Investorial.
Basically, you don’t want your family to live in poverty in the event of your death, but at the same time you don’t want them to hit the equivalent of a jackpot in the lottery when you die, either! Not only would you be paying ridiculous premiums, but you always want to be worth more alive than dead, so nobody knocks you off!
So, the basic minimum is to ensure that all of your family’s debts are wiped out. Next, everything else depends upon whether you have a working spouse and how long you would figure it would take if they were to remarry or whatever. You need to make some basic assumptions (like whether you want enough to cover the kid’s tuitions), then you just work out what they would need and work backwards.
Life insurance plans are quite flexible in that you can buy a menu load of riders with all kinds of different options available. My two cents.
Actually, it’s useful to have life insurance for children. I recall about 10 years ago when my cousin Steve was killed in a car accident, that my aunt said how grateful they were they had purchased life insurance from his university because it meant they didn’t have to pay too much out of pocket for his funeral, which cost about 15 thousand dollars. It does happen and paying out 15 grand in cash isn’t easy for all families. Furthermore, accidents do happen and it helps to have insurance on your children, should they have something awful happen and lose a limb.
What about making sure your mortgage has built in insurance so that if a spouse dies, the mortgage is paid off immediately?
As I understand it the mortgage insurance a lot of people have is a rip-off because the premium is based on the initial amount of the mortgage but the premium does not go down as the mortgage is reduced…so the advice my wife and I got was to purchase life insurance of the same level instead, since the life insurance will retain its full value (you continue getting what you paid for in terms of the premium/payout relationship).
what do you guys think about the need to get critical illness/disability insurance outside of what your work insurance already gives you?
I have noticed lately that there are alot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect.