In a previous post where I wrote about Wealth Preservation: Strategies to Protect What We Have Built and Lessons Learned, I focused on implementing investment strategies to safeguard our portfolio while still allowing our assets to grow steadily. In this post, I discuss another way to protect our assets, which is having a life insurance policy. Both my husband and I each have our own policy. In the event that if one of us would to die, during the mourning period we would want the other person not have to worry about selling off some of our investments to pay for expenses. We hope the family members who survived [either one of] us would at least stay financially strong even when their emotions are not. Once we achieve our financial independence (FI) number we will continue to keep our life insurance policies. Technically, by definition, being FI means we would have all the financial resources we’d need to live comfortably for many years to come. However, we always prefer having an extra layer of protection and security, for ourselves and for our loved ones. And having a life insurance policy gives us peace of mind.
My Life Insurance Policy
I purchased my life insurance policy in year 2010. It’s a Term Life (20 years) with $500,000 benefits payout. My annual premium is $216. I purchased the policy for my parents. If I would to die, my wish would to have my parents become financially independent and be able to travel and see the world. Now that we have a daughter, I changed my primary beneficiary to my husband, with my daughter being the secondary. As for my parents, my husband and I have made different arrangements.
When I was looking at life insurance back in 2010, I learned there are five types of policies: Whole Life, Universal Life, Variable Life, Variable Universal Life and Term Life. And the costs, structure, durations, cash value benefits, etc. of each type can vary by a lot even if the benefit amount is the same. You can read more about the features here.
After having done extensive research, I chose Term Life (and my husband agreed with me). I didn’t want to spend much money on premium and I just wanted a policy that protects my parents for a limited term period. My parents were in their late 40s, and I calculated that a 20-year term was good. Moreover, my husband and I agreed that we didn’t care about the growth potentials of our premium payments (we are generally skeptical of financial institutions plus we want to be able to manage our own money).
Tip: A life insurance policy is just another form of insurance. We don’t expect getting cash values or an investment return from our car or homeowner insurance. Why should we expect such from a life insurance policy? When an agent is trying to sell you on this idea, I hope you will have the courage to walk away.
Nowadays with a 2-years-old child, at one point I had a discussion with my husband: “Would it be wise to increase the number of years on my policy (my daughter will be 16 when the policy expires)?”. Our net worth has also gone up by a lot since the year I purchased the policy. As long my husband and I continue to invest and reinvest our nest egg prudently by following these strategies mentioned, we are confident our daughter would be financially fine from then on if we would to die. And you bet we are already doing everything we can showing her the financially savvy ways! All in all, the current size of our net worth has definitely made this decision an easy one.
Application Process:
1) I searched for a quote on the Internet. As a standard procedure, I filled out a questionnaire that asked me a list of personal questions and policy features I was shopping for.
2) I received a phone call from a life insurance agent within hours after hitting the submit button. The agent asked me additional personal questions, then set up an appointment for a nurse to come by my residence to draw blood and ask me medical questions. During the same phone conversation the agent told me about the various quotes offered by different life insurance companies. I didn’t have to make a selection at the time and requested to have the quotes sent to my email.
3) A couple days after the nurse stopped by, I received a call from an insurance underwriting company asking me to confirm certain statements I made throughout the application process.
4) The following day, I received a call from the same insurance agent asking about my experience with the nurse and if I have decided on which company to go with. I made my decision. Tip: Do your research and purchase your policy with a reputable company (great customer service is always a plus!). My dad’s insurance company went bankrupt during the Great Recession. Luckily, it got bought shortly after and the policy kept the same.
5) A few more days later, I received a congratulation call from the agent. I got my policy.
6) I received the policy package in the mail the following week. And I went ahead to set up automatic annual payment through my bank.
My Husband’s Life Insurance Policy
My husband’s life insurance is through his employer. He has the option to purchase payout benefits up to 6X his salary (his current policy is 5X). He has been paying the premium using after tax dollars, which means in the event of his death the payout amount won’t get taxed. His employer does also offer two pre-tax options with lower payout amounts, and the payouts would get taxed.
Open Enrollment period is coming up soon for my husband. We have been thinking about purchasing a policy outside of his work (his current premium is not subsidized). He is still young and the sooner we get a policy for him the better chance we can lock in a better rate. We’ll be looking into this purchase in the next few weeks. We have the feeling that the premiums will be about the same.
For those of you whose employers offer life insurance policies, be sure to find out if the premiums are subsidized and do the math. If the number is close to something you can get on your own (and the company is reputable), it might be a better option (again, the rates generally increase the older you get). You never know how much longer you’ll stay with your current employer. On the other hand, if your employer subsidizes part of the premium, take advantage of this opportunity to increase your financial security! You can read more about maximizing employee benefits in this post, where I wrote about taking the time to learn about our employment benefits and knowing how to maximize those benefits as a major step toward building our financial confidence and financial security (for the whole series, click here).
Considerations
It is always a debate when it comes to deciding how much benefits amount to purchase. For instance, some believe one should get a policy that pays out 10X the yearly salary. Others believe one should get enough to cover burial expenses and debts. Then, there’re those who believe one should purchase as much as he/she can afford, such as three million dollars to cover a family of three. Many online calculators got designed just to answer this question.
I didn’t use a calculator. I just did some simple math in my head and be done with that. During this process, it’s important to spend some time thinking about the beneficiaries you are purchasing the policy for. What are their ages? How many more years do you expect them to live? What’s their current lifestyle like? How’s their health? How’s their financial situation? Those were the questions I asked as I was putting together a policy. Once you have the answers, then you can design a policy accordingly. If you are married, it’s important to discuss the number with your spouse and that you’re both okay going with it.
Yes, I could have purchased a whole life policy, guaranteeing that my parents would be super financially cushioned if I would to leave this world before them. However, the truth is that my parents have been doing fine financially on their own. In addition, my brother is financially capable supporting them, too. Yes, I can afford a policy of $3,000,000 payout, but do my husband and daughter really need it when I’m no longer here? The answer is no.
Seriously take time thinking about the needs of your beneficiaries and buy what you are comfortable with. This means keeping in mind your own needs (and those of your family) and financial situation, too. For instance, if your parents are in their 60s and you really want to buy a policy that will protect them financially for another 30 years, then by all means regardless of their need (if this is what makes you happy). In my household, my husband and I will continue to keep our policies even after we reached FI (up till the term limit). We agreed this is what we want, and psychologically and emotionally, we feel better this way. Yes, buying a life insurance policy is personal and subjective. Do what works for you. Only treat rules of thumbs as a reference, not a must. Lastly, a life insurance policy is not just for people who have children. We can buy a policy for whomever we want to protect.
Your Turn!
Readers, do you have a life insurance policy? If so, how did you determine the number?
From your experience, what other considerations would you like to share with others when purchasing a life insurance policy?