The $1,000 Challenge, Part 8: Yes, You Need Life Insurance - but How Much?
So far in The $1,000 Challenge, I've shown you how I cut more than $700 from seven of my family's Top 10 spending categories. (If you missed any of the previous columns here on DailyFinance.com, check out the whole series so far.) As the syndicated Funny Money columnist for The Detroit News, I expected things such as transportation, housing and even entertainment to make up significant chunks of our spending, but I found it surprising -- and kind of unfair -- that what we spent on movies and dining out was nearly matched by our $299 monthly life insurance premiums.
Look, it was one thing to feel like we'd wasted our money on "Paul Blart: Mall Cop," but it was quite another to realize that Mrs. Funny Money and I had been investing several hundred bucks a month in something that would pay off only if one of us died.
As with any china I chip or spills I neglect to wipe up, I blame my boy, Funny Money Jr., or, as I call him, Li'l Money ('cause that's all he leaves us).
During the B.C. era ("before child"), Mrs. Funny Money and I carried life insurance that would cover little more than paying off our mortgage. Both of us had good jobs and would have been able to move forward on our own, using any extra money from a policy payout to overcome our grief in the arms of either Harrison Ford or the ladies of the Victoria's Secret catalog.
However, since I'm the primary breadwinner now, in the event of my untimely death, my family would require a payout that could retire all our debts and support my wife and son at least until the boy is through college. And should my wife prematurely shuffle off this mortal coil, I'd need a good-sized wad to cover everything she does, from chauffeur and cook to teacher and nanny.
Those kinds of changing needs and shifting family situations are why insurance coverage should be reviewed every two years, says my insurance expert, Ronald Ostezan Jr. of Insurance Partners Agency of America in Troy, Mich.
In some cases, he says, policyholders neglect to change beneficiaries and end up leaving a fat insurance check to an ex-spouse. In other cases, coverage needs have changed, family members have been added or passed on, or whole life and universal life policies that include investment elements aren't performing well because of lower interest rates.
"I see policies every day that are headed toward explosion" in this economy, Ostezan says. Our term insurance policies weren't exploding, but they were costing more than they should have, since we'd collected several over the years.
How much insurance do you need to leave behind for your loved ones? If you can afford it, you should try to get a policy that covers:
- Paying off all household debts, including the mortgage (if you have one)
- One year's worth of living expenses for your loved ones, so they can figure out just what to do now that you're gone
- Enough money to support children and other minor dependents through college
- And, if your spouse doesn't work outside the home, enough money to support him or her through to retirement, or at least make up for the loss of your income.
Your first step should be to meet with a certified insurance agent, review your coverage, and shop around for lower premiums. Another way to save on insurance is to eliminate expensive riders or policy add-ons, such as insurance that specifically pays off your mortgage if you die. It's much better to increase your term policy to cover that amount, but allow your survivors to have the cash to use as they need to at the moment.
Another item to nix is the accidental death (or double indemnity) rider, which pays extra if you get flattened by a piano instead of slowly succumbing to beriberi. Now stop and think about this: How would the financial needs of your family really change based on the manner in which you die? If you succumb to some dreadful, lingering disease, you might leave behind a pile of hospital bills. But a double indemnity rider only pays off if you die in an accident. What's the big extra cost there? Flying your corpse back from that weekend in Vegas? (Where, in all likelihood, your last words were "Hey, honey! Watch this!")
The only way I can see that an accidental death rider might be a good buy is if you work in a dangerous job and can't afford to buy all the regular life insurance coverage your family needs. (By the way, according to the Labor Department, the most dangerous job in the United States is taxi driver and not, as you probably imagined, firefighter, lion tamer, or pediatric dentist.)
If you have a full-time job, check your employee benefits. They might include some free or very cheap coverage for up to one year of your salary, %VIRTUAL-article-sponsoredlinks%and many companies will allow you to buy additional coverage, usually up to double or triple your annual earnings. Coverage up to $50,000 is tax-free to you, and payouts to your survivors under that amount won't be taxed either. But anything over that amount, including additional premiums you pay, will involve after-tax dollars.
Since that will lower your take-home pay, shop around and see whether it's cheaper to buy your own coverage, which has the added benefit that you won't lose it if you leave your job. On the other hand, make sure that whatever coverage you're automatically getting from your employer is factored into your overall plan. If you calculate that it'll take $300,000 to cover your family, and you're already getting $50,000 at work, you can lower your outside coverage.
Another way to save on insurance is to get healthier. When it comes to that whole betting scenario, insurance companies long ago figured out that people who are overweight, have high cholesterol, smoke, and have other lifestyle risks are more likely to die while they're covered. Naturally, the insurance companies charge more for people with those conditions.
If you've had some serious health issues, you may have purchased a "guaranteed issue" life insurance policy, which requires no medical screening and only asks that you answer some basic medical questions. If you had trouble finding a regular policy, this might've seemed like your only option. A better choice might be to shop for an insurer that specializes in covering people with your specific condition. These companies usually have a better, more nuanced approach to pricing that reflects how you're managing a chronic condition, such as diabetes, that can lower your premiums. The conditions that get hit with the highest premiums are heart disease, cancer, diabetes, obesity, and asthma or other pulmonary conditions. If you have trouble finding affordable coverage, ask your broker to check with carriers that specialize in "impaired risk" insurance.
The next step is to get healthier. Smokers can pay twice the rate on some polices as nonsmokers, and that includes users of e-cigarettes, cigars, pipes, weed, and hookahs. And, yes, smokeless tobacco counts too. When it comes to lowering your costs, however, you have to quit -- not lie about quitting, or, if you die of smoking-related disease, your insurance might not pay off.
Losing weight, lowering your cholesterol or blood pressure, and keeping chronic conditions in check by following medical advice can all help you lower your risk profile and your premium. Even if you've already got a policy, request a review if you've improved your health.
Similarly, if you used to have a dangerous occupation that resulted in a higher life insurance premium -- say, a skydiving instructor who moonlighted as a bomb-disposal technician -- don't forget to renegotiate your coverage now that you're an actuary working in a nice, safe office.
Another free option for trimming your insurance costs, if you can swing it, is to switch from monthly to annual or semiannual payments, which will lower your cost by 10 percent to 20 percent.
By combining our separate insurance policies and shopping around, Ostezan estimated we could save between $53 to $83 a month on premiums, for average savings of $64.40 a month. That's shy of the $100 in savings I was hoping for, but with the extra cost-cutting from previous weeks, I still got close to the $800 goal for the first eight weeks, missing it by a mere $5.21.
Of course, I'd rather save more, but at least it's good to know that my life insurance premiums aren't killing me.
Here's the running total for the whole series so far:
- Week 1 - Miscellaneous Spending: $132.89
- Week 2 - Utilities and Phones: $139.39
- Week 3 - Transportation Costs: $41.61
- Week 4 - Kid Costs: $114.50
- Week 5 - Work Costs: $90
- Week 6 - Personal Spending: $104
- Week 7 - Entertainment: $108
- Week 8 - Insurance: $64.40
Total Monthly Savings: $794.79
Read them in any order you want -- just get in there and start saving! Check out the series introduction to get the big picture on finding big savings in your family budget. You can check here on DailyFinance.com, follow me on Twitter, or go like The $1,000 Challenge Facebook page to get a heads up whenever a new installment comes online.
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