Summary
- There is no right answer as to how much death benefit you should purchase, but giving your surviving family members the option to purchase any outstanding debt might be a minimum that you could start with.
- A major life event like welcoming a new member of your family or switching jobs may be good time to review your life insurance needs.
- It might seem counter-intuitive, but if you have lost employment, it might still make sense to review your life insurance coverage to ensure sufficient benefits for your loved ones at good prices.
Introduction
About two months before my wife’s due date, I started doing some research on life insurance policies.
Rightly or wrongly, my research was kickstarted by the all the fear and uncertainty related to money, as I was preparing for the delivery of our daughter.
I first started out by reaching out to the insurance broker that handled my homeowners and auto insurance to see if he could help me out.
Long story short, I worked with a few insurance agents and brokers to understand and ultimately purchase life insurance for myself to start with.
The conventional wisdom that I heard over the years was “term and invest the rest,” and I wanted to verify this before I just blindly followed this piece of advice.
Below is a condensed version of my findings over the course of the last 9 months.
Surprise – you probably have life insurance already
From my two full-time jobs, I was already aware that I had some form of life insurance but admittedly paid little attention to it, until now.
To start, I logged into my company’s benefits administrator website to review what policies I held and what the coverage terms were.
You can do this too – access your employer’s benefits administrator to see if your employer offers what is called a “group” life insurance policy.
Chances are that your employer already pays all or a portion of your term life insurance policy while you’re employed with the company.
Oftentimes, you’ll have the option to keep the policy when you leave the company, at a price. But the rule of thumb here is not to continue since the premium is typically higher than what you can get elsewhere.
Upon reviewing my employee benefits, I confirmed that I had a term life insurance policy that is fully paid by my employer with the following terms.
| Coverage | Notes |
|---|---|
| Death benefit | $250,000 |
| Accidental death and dismemberment | $250,000 |
| Guarantee issue | No need to answer health questions to qualify for coverage |
| Premium | Employer paid |
| Accelerated life benefit | Yes. Lump sump paid if diagnosed with terminal condition |
| Waiver of premiums | If disabled prior to age 60, premiums waived until 65 |
| Conversion | Yes, can continue coverage after group plan is terminated but with conditions. |
| Benefit reduction | Reduced by 50% at age 70 |
While I’m at it, I also realized that my life insurance policy includes short-term and long-term disability insurance and reviewed the coverage terms (since disability insurance is one of the riders that I could add to my life insurance policy if the coverage wasn’t sufficient for my needs).
Short-term disability
| Coverage | Notes |
|---|---|
| Amount | 60% of salary / max $2,500 per week |
| Max pay period | 12 weeks |
| Accident/illness benefits begins | Day 8 |
| Evidence of insurability | Health statement not required |
| Minimum work | 30 hours / week to be eligible for coverage |
| Pre-existing conditions | N/A |
| Conversion | Doesn’t appear to be an option |
Long-term disability
| Coverage | Notes |
|---|---|
| Amount | 60% of salary / max $12,500 per month |
| Max pay period | Social Security normal retirement age (67 at time of writing) |
| Accident/illness benefits begins | Day 91 |
| Evidence of insurability | Health statement not required |
| Minimum work | 30 hours / week to be eligible for coverage |
| Pre-existing conditions | 3 months look back, 12 months after limitation |
| Conversion | Doesn’t appear to be an option |
| Survivor benefit | 3 months of benefits if you die while disabled |
| Work incentive | Benefits not reduced for a specified period so you can have part-time earnings during disability (your combined earnings cannot exceed 100% of previous earnings) |
| Limitations | 24-month benefit limit for mental health and substance abuse. |
| Others | First two years – get paid if you cannot work in your own occupation |
| After two years – get paid if you cannot work in any occupation based on training, experience, and education. |
The bottom line is, as long as I stay employed with the company, I have $250,000 of death benefit and some coverage in short-term and long-term disability.
My take is that the disability insurance coverage is sufficient for my family’s needs/lifestyle, but death benefit is not enough (more on this next).
Another lesson here is that, if I ever were to leave the current employer, I would need to revisit my life insurance and disability insurances.
How to decide on death benefit amount
Now that I established a baseline understanding of my existing life insurance coverage, I dedicated some time to understanding how much additional death benefit I want.
For some people, it might not be worth continuing any further because you don’t think you can make any room each month to pay for life insurance or you simply don’t feel like you need more coverage.
That is all fine, and I’m not here to convince you that you need a certain amount of life insurance.
From talking to multiple agents and brokers, I came across a few rules of thumb for life insurance, which I detail below.
- 10x multiplier method: multiply your annual income by 10x
- Adjusted multiplier method: take 70% of your gross yearly income and multiply 6-10x of that amount
- DIME: all debt balance (ex-mortgage) + annual income x # of years to support + mortgage balance + expected education expenses for children
- Return method: divide your annual income by a conservative annual return: $100k divided by 4% equals $2.5M
My philosophy is that many products/services that are sold by a large industry behind it (e.g., engagement rings with large marketing budgets and may not have your best interest at heart.
For me, what made sense is the following.
- I want my beneficiary to have the option of paying off any debt and/or mortgage balances as they wish What Happens To Your Mortgage When You Die? (cnbc.com)
- Amount needed: ~$650,000.
- I already have enough set aside and compounding in retirement savings that my wife doesn’t have to worry about retirement.
- Amount needed: $0
- Between our savings and brokerage accounts, we have enough to pay for our expenses until my wife figures out a childcare and employment solution, maybe with the help of both sides of our families.
Comparison of Life Insurance Policies
I ended up getting a few life insurance policies and quotes from different agents and companies.
| Criteria | AAA | AAA #2 | AAA #3 | Ladder | Amica | Fidelity | Ethos |
|---|---|---|---|---|---|---|---|
| Type | Indexed Universal Life | Indexed Universal Life + term option | Term | Level Term | Level Term | Term | Term |
| Initial base death benefit | $800,000 | $600,000 | $650,000 | $650,000 | $650,000 | $650,000 | $650,000 |
| Initial death benefit option | Increasing | Increasing | No | No | No | No | No |
| Monthly premium | $704.67 | $704.67 | $82.95 (includes $54 annual policy fee) | $48.76 / tweaking to 20 years would be $28.09 | $42.24 | $24.99 | $48-97 |
| Minimum initial premium | $170.51 per month | $158.11 | $82.95 | $48.76 | $42.24 | $24.99 | N/A |
| Accelerated death benefit | Yes | Yes | Yes | No | Yes | N/A | N/A |
| Overloan protection agreement | Yes – no charge until exercise | Yes – no charge until exercise | No | No | N/A | N/A | N/A |
| Term insurance agreement | No | Yes | Yes | Yes | Yes | Yes | Yes |
| Waiver of premium agreement | No | Yes – if disabled before age 60 | Yes – if disabled before age 60 | No | N/A | N/A | N/A |
| Coverage period | Unlimited | Unlimited | 30 years | 30 years | 30 years | 20 years | 30 years |
| Renewable option | N/A | N/A | Annually renewable every year until age 95 without evidence of insurability | Annually renewable for five year after initial term at a higher unstated price. | N/A | N/A | N/A |
| Others | Perks like subscriptions, goods, and services. | ||||||
| Carrier ratings from A.M. Best | A+ | A+ | A | A- | A+ but outlook negative. | A- | A+ |
| Notes | Carrier is Securian Financial | Carrier is Securian Financial | Carrier is AAA Life Insurance Company | GEICO partners with Ladder, and Ladder works with S.USA Life Insurance Company in CA. | The terms were not viewable and left as N/A in the table. | The terms were not viewable and left as N/A in the table. | I was given a range based on basic information but the terms were not viewable. |
Conclusion
After comparing 7 different policies from 6 different insurance companies, I decided to continue my application with Amica given that it 1) offered the most affordable option and 2) had the highest ratings.
I completed the rest of the application process and was quoted a monthly price of ~$41 after getting a discount for opting to pay the full annual amount.
At the moment, my policy is still being reviewed by underwriting and I expect to have to submit some more additional information related to my health (maybe I’ll have to go in for a health exam). I’ll update the post with any news I have.
