Life Insurance 101

So.  Life insurance.  I’m feelin’ like a big kid lately.

Shortly after the wedding, a friend on my frisbee team who works for Northwestern Mutual contacted us, asking if we would be interested in getting some life insurance.  At first, I felt like that was something we could put off, but since we are buying a house (i.e. taking on a substantial amount of debt), life insurance makes a lot of sense.  While Husband and I have budgeted so that we can afford our life style one only one salary though we are both working, I imagine we’d be pretty sad if the other got hit by a bus and died, possibly not working for awhile – and even though we’ve got emergency funds available, and a decent amount of investments, eliminating some of the financial pressure for a worst case scenario like that seems prudent.  So we agreed to meet with our friend (subsequently called NWFriend) – and that meeting occurred yesterday.

We were asked a ton of details about our financial attitudes and current financial situation, our life plans and goals, our health.  I kind of like having those conversations because they tend to stroke my ego a bit – I feel like Husband and I have done a good job of creating a great financial foundation for ourselves.  So NWFriend gave us a bunch of info about different options, and based on our current life style and future goals, outlined what would be good for us to get.  We ended up getting a $500,000 term policy on me, and a $650,000 term policy on Husband, both expiring at age 80 (this is a standard age limit).  The premiums are $20/month for me and $30/month for him, so pretty low in terms of our income.  The premiums increase every year over the duration of the policy, but very slowly at first.  However, if we still have the policies when we are 75, it will cost something like $10k a year each.  That sounded crazy at first, but it’s not.  First of all, it’s standard amongst all term policies, and second of all – it makes sense.  When you are 75, you are probably going to kick it soon.  Plus, having relatively higher expenses for life insurance are offset by (presumably) having lower expenses for things like housing.

We wanted to get policies that would allow us to pay off the major debts we have (~240K house loan, 10k student loan debt) so that the reduced income wouldn’t send the survivor into having to spend down our savings.  Also, in anticipation of other life changes that will likely occur in the next 5-10 years (one or more kids), we wanted to get enough that the survivor could invest the remainder of the money and receive monthly income off that investment.  250k invested roughly equates to about $1000 a month in income.  As neither of us anticipate being a stay-at-home parent, we can currently assume that 500k and 650k policies are adequate.  Often in situations where a woman is a stay-at-home mom and the man works, you would end up with $500k and $2 mil. policies, respectively (once kids are a certainty/actually exist).  We got a more expensive policy on Husband because boys die sooner, and because if I die tragically, Husband is more likely to bury himself in work, whereas in the opposite scenario, it’s entirely possible that I would stare at a wall for a year.  This is true for us, and true generally for most couples.

We got a higher policy amount for me than many couples choose at our age, because of my high earning potential and because of my health risk factors for MS.  As NWFriend said repeatedly, the cheapest life insurance you can get is what you should have bought yesterday – because I’m currently healthy and should easily pass the physical, I can get a cheap policy that won’t change if I do end up having MS; if we waited to buy more until I developed MS I would either be uninsurable or insurable at great cost.  Also, it’s very easy to change the policy (though easier to reduce than increase).

Another aspect we talked about briefly and will look into more later is permanent life insurance.  While term runs out at a specified age (80), perm runs out when you die.  Perm sounded like a forced savings plan, where you purchase a policy amount at a fixed premium that never changes, and have that amount invested in the companie’s (i.e. NWM’s) mutual fund, which has received at lease a 6.5% dividend (I think it was dividends) for the past 150 years (that was the line NWFriend fed us at least!).  Then you can receive the dividends as cash or reinvest them (like for any mutual fund).  For the term policy we purchased, we can choose to convert any portion of it to permanent before we turn 60.  I’m sort of fuzzy on the details of permanent insurance – I want to look into it more, but it sounds like a intersection of life insurance and forced mutual fund investment.

Life insurance is often offered by employers, and while we will likely take advantage of the highest policy amount we can get without needing a physical, we don’t want to rely on this alone.  If we did, and one or both of us lost our jobs, and then tragedy struck – well, that sucks.

Ok, so back to our purchased term life insurance -we went ahead and set up an automatic bank draft, and are already insured less than 24 hours later.  We had our physicals this morning (I won – my pulse and blood pressure were totally lower than Husbands!  Suck it!), which included medical history, height and weight, urine sample and blood draw.  We didn’t warn our roommates before hand, so they came down to breakfast to find us giving blood to some random lady in the kitchen.  Good times.

Finally, while I don’t think it would be a big deal if we had waited a few years to purchase life insurance policies (perhaps until we were actively trying to reproduce), I feel good about having gone ahead and taken care of it.  Partially because I have morbid anxiety problems and think about that hit-by-a-bus scenario on a daily basis, and partially because it makes me feel all grown up and responsible and holier-than-thou.  You know, if I’m being honest :)

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2 Responses to Life Insurance 101

  1. Jess says:

    I totally and completely agree with you. We are in a very similar financial situation. We carefully arranged our mortgage so that we can in theory survive on one income, and we could–but it would be tight. And if Torsten died I wouldn’t want to be in the position of HAVING to work. We really need to do this. I will feel much better once it’s done. It’s the first step of setting it up that scares me. Since I have life insurance already through my employer, and since Torsten earns way more than me, I think I will wait until I’ve lost a bit more weigh until I look into getting private life insurance that requires a physical. But I think now’s the time as far as Torsten is concerned.

  2. Pingback: life insurance, part 2 « The Grumpy Toxicologist

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