Okay, so I have walked you through the process of how to determine the right amount of life insurance coverage in part 1, and why whole life insurance doesn’t make good financial sense in part 2. In the 3rd part, I am going to provide you with my analysis of term life insurance.
- My 20 years, $380,000 coverage will cost me a total of $7,365 (or, an opportunity cost of about $18,000 — i.e. if I invest $7,365 and earn 8% return on investment per year on average).
- My wife’s 20 years, $290,000 coverage will cost her a total of $4,939 (or, an opportunity cost of about $12,200).
Unlike whole life insurance where the opportunity cost easily exceeds the coverage, term life insurance provides risk protection at minimal cost. This is what we call leverage. Basically, I am using $7,365, or less than 2% of $380,000, as leverage against catastrophes.
Projecting Needs of Dependents
The key decision making factors for us is our age, how old we’ll be at the end of the term, and who might be dependent on our income during the term.
I am 34 years old and my wife is 28, and we also have a 2 months old son. We are planning to have a second child within the next 4 years. Additionally, my parents are 62 and 64, and they may need our financial support during their retirements. Her parents are also in a similar situation. Lastly, we have about 10 more years to go on our current mortgage.
In 20 years
I would be 54 years old and my wife would be 48. Our son would most likely be a junior in college and our second child a freshman.
Our parents would be around 80 years old. Lastly, we would be done with our mortgage unless we decide to upgrade.
In 25 years
I would be 59 years old and my wife would be 53. Both our children would be done with college and financially independent. Our parents would be around 85 years old.
In 30 years
I would be 64 years old and my wife would be 58. We shouldn’t have to worry about our children, nor parents, at that point.
Why 20 years and not longer?
Based on the projections above, it looks like 20 years is the best choice for us, due to these key financial obligations:
- Saving and/or paying for college expenses
- Subsidizing my parents post-retirement living expenses
- Paying for mortgage
I am not worried about going longer than 20 years because there’s probably no one left to depend on our income. Our children would be independent, and our parents probably won’t need the money by then.
What about inflation?
I am not worried about inflation either. In the 20 years span, I will be adding money and building up our retirement funds, college education funds, and our net worth. This means that $380,000 or $290,000 don’t have to stretch as far as we get older.
Looks like I will be switching from my employer’s term life insurance, and get our own to cover both my wife and I. However, I am not jumping the gun yet. I am not sure if the estimate of $380,000 and $290,000 are good estimates. I’ll be recalculating our coverage needs one more time and then run the numbers through InsureMe to get the best price.
Other articles in this series: