Life Insurance Question

[Ken_AA]

At 26 and having my first child on the way I have become interested in how much life insurance my wife and I should have, along with what kind.

Is whole life a poor investment, or is term a waste of money?

Thank you,
Ken

[Jimbo232]

To determine life insurance needs a very general rule of thumb is at least 8-10x your salary. This all depends on your personal situation though:
-Does your wife have the ability to support herself financially?
-Do you have large outstanding debts including your mortgage?
-Do you have savings currently for your children's education?
-What do you and your wife feel is necessary for her and your children to lead a normal life in the event of your death (i.e. pay off mortgage, fund child's education, etc.)?

I believe whole life insurance is a waste of money and just something "financial advisors" try to scare you into purchasing because of high commissions for themselves. Almost always you will be better off buying a cheaper term policy and investing the yearly savings on your own in a low cost index fund.

The tax benefits of a whole policy are usually eroded by management fees and poor mutual fund options. The cash value of the whole life policy does not build to a breakeven point for many years (~decade) so if you need to cancel the policy early you will be out of luck. There is no reason to have your money tied up with an insurance company for decades in a whole life policy waiting on a reasonable cash value.

Life insurance should be used to protect your financial dependents and not for investing. Save yourself the money, buy a term policy, and make sure to open up a 529 for your child and max out your and your spouse's IRAs, 401Ks, and other retirement accounts.

[Shoe]

Term is the way to go.

Remember, your life insurance agent is going to try to sell you way more than you need.

Life insurance is not something you buy/use to fund your retirement. It's only purpose is to provice your wife/children with a way of maintaining their quality of life in case the unthinkable happens to you. I would suggest something like a 20-year term policy for around 10-15x your income. Depending on how much your wife makes and how well she could support herself if you died, and how much in assets you already have built up is a big factor in how much you want to take out. If she is completely dependent on you, then you want more, if she is able to work and provide, you might not need as much.

Also, once your kid gets to be 18-20, you don't need as much insurance anymore as they are getting to the point where they can start to provide for themselves. Each situtation will be dependent on the circumstances, so buy as much coverage as you feel is adequate to support your family in case they lost you.

Don't buy it as a way to fund your retirement, that is what retirement plans are for (and retirment plans give you much more bang for your buck). All forms of insurance are meant to cover emergencies only, anything more than that is -EV.

[Ken_AA]

Thank you very much for the advice.

Any thoughts on what a policy for about 200K should cost? (about five times my income but my wife makes more then I do so this policy would pay off all our debt and provide a solid jumping off point for her)

Also, are their any loopholes I should look for in the policy such as it does not pay if such and such happens?

Thanks again,
Ken

[wdcbooks]

The preceding advice is correct. Whole life is one part of what are known as cash value policies. These can range from whole life with a fixed payment and you earn a fixed interest on your excess premium to variable universal life which directs part of your payment to mutual fund like options. Unless you need permanent insurance, which you don't, these are lousy options.

As far as cost, term insurance is almost always far cheaper than you would expect. For a non-smoker around age thirty you will usually pay a bit over $100 a year. I don't have exact quotes in front of me, but there are a million internet based quoting sites you could use.

One interesting note is that for a healthy non-smoker the life insurance option through your work's benefits plan is usually significantly more expensive than what you could purchase on your own. I have found that it can be as much as 2-3X more expensive.

[shaftman11]

[ QUOTE ]
Thank you very much for the advice.

Any thoughts on what a policy for about 200K should cost? (about five times my income but my wife makes more then I do so this policy would pay off all our debt and provide a solid jumping off point for her)

Also, are their any loopholes I should look for in the policy such as it does not pay if such and such happens?

Thanks again,
Ken

[/ QUOTE ]

Just make sure it isn't "Accident Only", though your agent should make sure it is the right policy. The obvious, don't lie at all on the medical questions. If you pass in the first 2 years, the insurance company is going to try to do everything they can to not pay on that claim. Even the smallest mistake or omission can void the policy. After 2 years they lose that power. Hopefully you don't use tabacco at all, if you do, it will double your preium. Ask you agent about some of the riders that are available, yes they can increase his/her commision, but there are some crazy deals out there. One example is the "Return of Premium Rider", it obviously costs more, but you will get back every penny (minus any claims) that you give the insurance company. And finally, if you can afford it, pay your premium for year upfront. This can save you as much as 15% and cut into the agents commision [img]/images/graemlins/wink.gif[/img]