How much is a life worth?
June 25, 2007 1:16 PM   Subscribe

Educate me about life insurance.

I'm female; under 40; non-smoking; the primary wage earner in our family (I earn 2/3 of our income, my partner earns 1/3); we own a house and have a son who will be one year old in July.

For many years, I had $100,000 in life insurance through my employer, however this benefit is no longer available to me so I've started shopping for insurance and, I have to say, everything seems prohibitively (ie: $100+ per month) expensive, and I'm having a lot of trouble sorting out the options. We're guessing that I need about a $250,000 policy (which would pay off our house and car, my funeral, plus leave some savings for our son).

What are the real-world differences between Term Life, Whole Life, Variable Life, and Universal Life? Which is the "normal" thing for someone in my situation to buy, given that our budget is very tight? I know we can't afford to be without insurance if something happens to me, but honestly an extra $100 per month would put a huge strain on our budget right now, so is this a "reasonable" price for a young-mom-non-smoker to expect, or are the internet quotes I'm seeing too high?

I realize I should speak with an agent about this, but a) I'm working two jobs and its difficult to take time away from work to make an appointment and b) frankly, I feel as though if I go into a conversation with an agent uneducated I'll end up getting sold something more than I need or want.

So please, educate me about life insurance.
posted by anastasiav to Work & Money (11 answers total) 21 users marked this as a favorite
 
The short answer is term life. Here's why.
posted by Pater Aletheias at 1:32 PM on June 25, 2007


Term insurance is insurance which lasts for some fixed amount of time. If you are in your 30s, you might get a 20 year term. When you are 50 you'll be uninsured again. The idea is that by the time you are 50, you will have paid of all your debts, and will have assets to cover any costs associated with your death. I'm pretty sure you can get term insurance for much less than $100 a month.

Also, any plan which you can cash out is usually a big rip-off. You're better off just investing the money if you want a payout before you die.
posted by chunking express at 1:34 PM on June 25, 2007


i worked a state farm agent for a couple years and was a licensed agent in oklahoma. agents like to sell you whole life et al, because the premiums are higher. We always called whole life (universal and variable are forms of whole life) permanent life insurance because it doesn't expire within a set time frame like term insurance. If you are concerned about becoming uninsurable in the next 20 years, whole life should be considered as you can maintain that policy at the initial premium. With term, once the term (10, 20, 30 years) expires, you have to requalify and pay the premium for your age at that time. In some cases you can pay the premium for a set amount of years and then quit and have the same payout. The life insurance benefit is the same for whole and term life - the difference is that whole life includes an investment component. In most cases, you aren't going to get rich off of this investment.

Those are the facts. THis next part is my opinion. Buy a 20 or 30 year term policy for yourself, you can probably get a pretty cheap rider for your husband if you wish. The "investement" isn't worth the extra premium - you would be better off putting the difference between the term and whole life into a retirement plan. Go with a well known, stable carrier with a local agent. Don't buy off the internet. I haven't priced life insurance lately, but i would think you could get a 250000 term policy for around $50 but i may be way way off on that. I am just basing that on what i personally have, although it was purchased a few years ago.
posted by domino at 1:42 PM on June 25, 2007


Buy enough insurance for each of you to cover your mortgage and debts and to provide for full-time childcare for five years and part-time care (after school) for 10 years, plus something to cover college. If eliminating your mortgage and debts would leave either partner in a position where they could still afford to hire childcare (even if they're depressed or injured), you could have slightly less. You'd likely want coverage for 20 years, which should be enough time to get your mortgage paid off and to have saved something for college.
posted by acoutu at 2:56 PM on June 25, 2007


By the way, you might want to use an insurance broker. They'll shop around and find the best rate for you. Less hassle on your part and they'll send the forms right to you when you choose a package. I never even met our broker.
posted by acoutu at 2:57 PM on June 25, 2007


I got 20 term life insurance for a very high amount, and it's only $600 or so a year. Try Accuquote (dot com) out -- they were featured in freakonomics for totally blowing out the insurance industry and making things cheap.
posted by mathowie at 3:33 PM on June 25, 2007 [1 favorite]


As a past insurance agent, I'd like to agree with some of what's been said and also expand on it.
Buy enough insurance for each of you to cover your mortgage and debts and to provide for full-time childcare for five years and part-time care (after school) for 10 years, plus something to cover college. If eliminating your mortgage and debts would leave either partner in a position where they could still afford to hire childcare (even if they're depressed or injured), you could have slightly less. You'd likely want coverage for 20 years, which should be enough time to get your mortgage paid off and to have saved something for college.
This is perfect assessment of what you need.

Now as to your question about the different types of insurance, you mention: Term Life, Whole Life, Variable Life, and Universal Life.

Term life, as others have mentioned, is a policy which covers only a specific period of time (the "term"). This type of policy is generally more affordable, but also does not carry a cash value (which I'll explain in a moment). The price of insurance over the term stays the same. Term insurance is good for knocking out specific costs that may be incurred by a death. For example: if you're 10 years into a 30 year mortgage that has $150k left to pay off, you'd want to get a term policy that lasts for 20 years for at least that much. That way, you know that the surviving spouse can at least stay in your house, should something happen, and have the mortgage paid out. Next, you'd want to add in the costs of, say, a car. So put in there another $30k. Get the idea?

Whole life and Universal life (UL) are examples of "permanent insurance." These are policies which last until at least age 100. These days, very few people are buying whole life policies anymore because they're expensive and lack "features" of any type. Instead, people are going with Universal Life insurance, which is flexible and more affordable. However, because permanent insurance carries a cash value, it's going to be more expensive than term insurance.

Cash value is basically an "account" within the life insurance into which your premium payments go into. You can borrow against this cash amount, or liquidate the policy and get a certain amount of money back. Life insurance policies are not investment vehicles, however, and should not be considered as such.

With a UL, you can also be flexible in your premium payments. Usually you have to pay into the policy for at least a year, maybe two, before you can start this feature. But let's say you're short on the money in January, you can forgo a payment that month and then pay more the next month -- or not. You don't want to skimp on your payments, however, because with UL you're also getting fees taken out to cover the cost of life insurance. If you stop paying for too long, or take out too many loans on the policy, your policy will exhaust itself and cancel, at which point you'll have to buy the insurance again at an older age, and re-qualify. On the flip side, if you begin making more money after a few years you can also start putting in more money and eventually increase your death benefit.

I didn't work with Variable Universal Life, so I don't know too many details, but I can tell you that a certain amount (possibly all) of the cash value is invested in the market, which allows it to grow faster. After a certain point, your death benefit will start to increase as well. This type of policy is perfect for covering the cost of future college expenses, as it will help you outpace inflation. ($50k in a permanent policy to help pay for college may be enough for today's schools, but what about in 20 years? You'll probably be lucky to pay for one year at an in-state school for that amount.) Because you're investing over a long period of time (10-20 years until college, I assume?), the risk factors of the market are lessened. However, you need to ask your life insurance salesman if the VUL policy includes any type of features which help you "lock in" high watermarks for the market and/or choose your portfolio. If you can choose your portfolio, or if the company gives options for certain types of portfolios, you want to go with a very diverse range of investments to protect you against market downturn. The high watermark lock-ins, if available, will ensure that any market gains are not lost. An adviser can explain these terms in more detail, but at least you're armed with basic knowledge.

(Sidenote: life insurance should not be the only means by which you prepare for, or protect, your child's college education costs. You also need to talk to an investment adviser about tax-deferral plans which allow you to put away money for your child's education.)

An important point that has not been mentioned, which you need to be especially vigilant and aware of, is that you DON'T have to cover all of your life insurance needs with just one type. Generally, if you go to a life insurance broker, they're going to try and sell you on one or the other -- term or permanent. But you need to mix-and-match as is necessary with your current budget. Choose a smaller amount of permanent insurance because it costs more, but a larger amount of term insurance to cover costs which will sunset eventually. And keep in mind that you DO need permanent insurance to cover costs into your senior years.

Do not allow salesmen, be they in person or over the phone, to attempt to close you into a certain policy or plan. Like buying a car, this is something you need to think about. Get all the marketing literature that the salesman has/offers, and also ask for numerous hypothetical illustrations (often just called "hypos" or "illustrations") which demonstrate how the policies will perform over the long-run. Bring this home and lay it all out on the kitchen table. Be prepared to talk with your spouse about all the options, and understand them all clearly. This may take a few hours, but remember that you're preparing for a future catastrophe which, if it happens, will change your lives entirely.

There are some websites which offer "brokerage" type services, where they match you up with cheap life insurance from a number of companies. There's nothing wrong with them, but be aware that all of them that I'm aware of deal only with term policies. You may want to have them prepare some quotes for you, and then go talk to a life salesperson in person at an investment advisor's office to put together a full plan.

Hope that helps!
posted by PandemicSoul at 9:11 PM on June 25, 2007 [6 favorites]


And one more thing -- it's great that you're preparing for tomorrow, and what I'm about to say shouldn't negate anything I've said previously: but don't live for tomorrow if you can't live for today ;) I realize your budget is tight, so on that note, buy what you CAN afford today -- it's better than nothing, right? It's BETTER to buy all of it now, because then your costs are low due to age. But if you have to buy the bare minimum and buy more later when life changes (new job, etc.), that's ok too. Also, does your workplace not offer ANY life insurance anymore? That's a vastly cheaper option for your term coverage needs, even if the old policy isn't available anymore.
posted by PandemicSoul at 9:14 PM on June 25, 2007


I've always heard "term life and invest the difference", but no one actually invests the difference. Acoutu offers sound advice, but you might want to tweak it a little if you expect your partner to earn more or less than 1/3 of your income in the future.

What I always hear about insurance is only insure for what you could not afford to pay. If you can't afford to insure and meet your retirement investment goals, and you don't expect to be earning a lot more as a family in the future, you might want to take it as a reality check on your budget. It's an American pastime to live beyond one's means. Can you ditch the funeral and go for cremation in your plans? Can the house be downsized if you die?

Sorry, I'm not sure that was helpful.
posted by BrotherCaine at 9:44 PM on June 25, 2007


This is a great example of how AskMe can tap into expert knowledge. With the clear warning that I am not among them, let me challenge slightly the estimates as to how much. An above illustration used this example:

For example: if you're 10 years into a 30 year mortgage that has $150k left to pay off, you'd want to get a term policy that lasts for 20 years for at least that much. That way, you know that the surviving spouse can at least stay in your house, should something happen, and have the mortgage paid out. Next, you'd want to add in the costs of, say, a car. So put in there another $30k. Get the idea?

Note that this means you would be insured for a 150K payout when, in a standard mortgage, it will be steadily dropping from that number and approaching zero at the end of the term. So that is a very risk-averse number. I recognize that insurance is about risk averseness, but just recognize that you will be building in some slack, and might want to consider using a midpoint figure if you're cash-strapped.
posted by Clyde Mnestra at 6:42 PM on June 27, 2007


"Very" risk averse, yes and no :) In terms of life insurance, you're just as likely to die at 40 as you are at 50 -- an accident can happen anytime. So you're just as likely to need 150 as you are to need 75.

There are, however, policies that have a declining premium and death benefit over the course of say 20 to 30 years, but I didn't want to get too detailed. A salesperson at an insurance company will be able to give more information about that.
posted by PandemicSoul at 5:57 AM on June 28, 2007


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