It's that time of year again, where I get the invoice for my annual life insurance payment and re-evaluate our life insurance needs. This year is a little different than previous years because we also welcomed our fourth child into the family last month.
WHY HAVE LIFE INSURANCE?
To me, the purpose of having life insurance is to provide for my family in the event of my death. It is no coincidence that my policy payment occurs in the same month as my oldest child's birthday. Prior to having children, the only life insurance I had was whatever was offered free through my employer (4x salary plus $50,000). While that was certainly generous, as a newly married couple it was actually more than we probably needed. My wife had a good job, and either of our incomes was enough to support us both. When we found out we were expecting our firstborn, we knew that we wanted to have more coverage.
During my wife's pregnancy, we were saving 100% of her income and our plan was for her to be a stay-at-home parent. We wanted to have enough life insurance so that if something were to happen to me, she would be able to continue to stay home with our children at least until they finished high school. If something were to happen to her, the plan was (and is) for me to move closer to family, but still to have some life insurance to help cover childcare costs that we currently aren't incurring.
At the time, our household expenses were under $50,000/year and we settled on 20-year term life insurance policies of $500,000 for me and $250,000 on her. This, in addition to my employer provided plan felt like plenty of coverage. I have since moved on to a new employer but still have life insurance provided by the company equal to one year of my salary. It's worth pointing out too that the death benefit of life insurance policies is not taxed, so 100% of the benefit actually would be received as cash.
RE-EVALUATING OUR NEEDS
Each year when we pay our life insurance bills, we ask ourselves if we still feel that we have the right amount of coverage. So far, that answer has always been yes. As our family has grown, we've been able to keep our expenses pretty well contained and we've continued to save and grow our net worth.
Although much of our net worth is tied up in retirement accounts and home equity, if I were to die Mrs. DIY$ would sell the house and be able to access my retirement accounts without any penalties and would have a net worth over $1M. We are targeting to have more than $1M in net worth before we fully retire, but this would be plenty of cushion to allow her to sustain the household long enough to get all of the kids grown and then some. She hasn't been in the workplace since becoming a mom but looks forward to being able to re-enter the workforce at some point in life, so this would not be a burden if she weren't left with enough for an immediate lifetime retirement.
SIMPLE ADVICE FOR CONSIDERING WHOLE LIFE INSURANCE
Life insurance salespeople will sometimes argue that buying term life insurance is throwing money away and that you should consider whole life insurance for the savings and investing benefits. To that my simple rule of thumb is this.
"Don't invest using and insurance product and don't expect insurance from an investment product".
If you can remember that one simple rule, you'll avoid significantly overpaying for life insurance and also have more realistic expectations from your investment portfolio.
To the life insurance salesperson who says we're wasting money on term life, I'd add that we have 14 years left in our 20-year policy and my policy costs $365/year. I'll be thrilled if 20 years passes and I end up having flushed $1 a day down the toilet for that time, but my mind is at ease knowing my family would be taken care of should the awful happen.