10 Tips On Life and Disability Insurance: How And Why We’re Getting More

by Silicon Valley Blogger on 2007-03-2637

My “digerati spouse” left his job 7 months ago to do his own thing. Now with the job loss, we lost the best company benefits we’ve ever had, including long term and short term disability insurance and a fairly generous accidental life insurance package. Because of my spouse’s startup business plans, we’re foreseeing 1 or 2 years of covering ourselves on our own dime now, though it helps somewhat that I work and therefore have some benefits to cover the family.

Following are some basic tips on purchasing insurance that I’ve followed.

We had no life nor disability insurance before having kids, as we had no dependents. We figured that if anyone of us didn’t work, the other could cover for the household. These days, that won’t fly. If a breadwinner passes away or gets disabled at an opportune time, then we’ll need an income stream from somewhere. Two kids who we want to see in college one day, and hopefully to good universities will require coverage. Not to mention that right now, we feel the pain of one of us not bringing in an income. In fact, while our income has diminished, our outgo has increased, primarily because of funding the business we’re trying to develop.

We’re winging it on one salary presently, and it’s tough; but it’s temporary and we’re giving it a maximum of a couple of years. But the experience has given us some idea of what it’s like to live on only one income stream for a household that actually requires two incomes to run. I doubt any of us can survive indefinitely at our current level of spending unless we had another source of income in case one of us becomes compromised.

life insurance

So enter: life insurance. We have term life insurance, which is the cheapest you can get anywhere. We have never considered variable or permanent life insurance because we prefer to avoid combo type accounts that try to kill two birds with one stone by offering you death benefits plus an investment account to boot. We’ve followed conventional advice here, and in this sense, you can call us purists. We prefer to have our premiums as low as possible and rather than build up money in our insurance accounts, we’d rather use the savings we get from the lower term life premiums to invest elsewhere ourselves. This scheme gives us the most flexibility and control over our own assets.

We know that this works since for example, we know others who have the more complicated types of life insurance which they end up paying much more for. They end up getting woefully less insurance than they should simply because of the steepness of the premiums. Because we have term, we can purchase policies with high death benefits, which makes us feel confident that we’ve adequately taken care of our family.

So herewith is what we have.

Our Insurance Policies

  • Two 30 year TERM life insurance policies that are $1 million each
  • One short term disability for myself from work, covering 60% of my salary
  • One long term disability policy for myself from work, covering 60% of my salary

What is our gap? We’re feeling like we need to beef up these policies further. Our plan is to purchase more life insurance on our main breadwinner, my spouse, as well as get him a long term disability policy.

How much we should get can be technically calculated through tests and formulas. Here’s a cool table reprinted from The Motley Fool showing what your replacement income needs are. This can help give you some idea about how much coverage to consider:

Replacement Income Table

Current
Annual
Income
Years Until You Retire
10 15 20 25 30 40 60
$10,000 $92,000 $132,000 $168,000 $201,000 $231,000 $283,000 $361,000
$20,000 $184,000 $263,000 $336,000 $402,000 $461,000 $565,000 $722,000
$30,000 $276,000 $395,000 $504,000 $602,000 $692,000 $848,000 $1,083,000
$40,000 $368,000 $527,000 $672,000 $803,000 $923,000 $1,130,000 $1,444,000
$50,000 $460,000 $659,000 $840,000 $1,004,000 $1,154,000 $1,413,000 $1,805,000
$60,000 $552,000 $790,000 $1,007,000 $1,205,000 $1,384,000 $1,696,000 $2,166,000
$70,000 $643,000 $922,000 $1,175,000 $1,406,000 $1,615,000 $1,978,000 $2,527,000
$80,000 $735,000 $1,054,000 $1,343,000 $1,606,000 $1,846,000 $2,261,000 $2,888,000
$90,000 $827,000 $1,185,000 $1,511,000 $1,807,000 $2,076,000 $2,544,000 $3,249,000
$100,000 $919,000 $1,317,000 $1,679,000 $2,008,000 $2,307,000 $2,826,000 $3,610,000
$110,000 $1,011,000 $1,449,000 $1,847,000 $2,209,000 $2,538,000 $3,109,000 $3,971,000
$120,000 $1,103,000 $1,581,000 $2,015,000 $2,410,000 $2,768,000 $3,391,000 $4,332,000
$130,000 $1,195,000 $1,712,000 $2,183,000 $2,610,000 $2,999,000 $3,674,000 $4,693,000
$140,000 $1,287,000 $1,844,000 $2,351,000 $2,811,000 $3,230,000 $3,957,000 $5,054,000
$150,000 $1,379,000 $1,976,000 $2,519,000 $3,012,000 $3,461,000 $4,239,000 $5,415,000

First Column: Annual income to be replaced. Top Row: Years of replacement income required. Table Body: Lump sum life insurance required. Assumptions: Annual inflation rate assumed to be 4.0%; Annual investment return assumed to be 6.0%.

What this is telling us is something I can’t believe: that we’ll require total combined life insurance coverage worth $5 million for 30 years for two income earners! That’s hefty. We’ll need to reconsider that amount. Perhaps we can adjust this value to reflect coverage for less than 100% replacement income, for example. And it helps that we’re also learning from what other people are doing. We just heard how a close friend upped their life insurance to $3 million per parent after they heard of some tragic story befalling one of their acquaintances. To afford the premiums for this (for term, it’s $1,000 annually, per $1 million policy), we’re thinking of laddering the purchases: picking up a 20 year policy today, or a 10 year policy after every 5 years until we reach our desired coverage. We may not have the money budgeted today to buy the full amounts, but we may afford it later.

So for now, we’d like to hike our insurance levels to:

  • an additional $1 million for my spouse for 20-25 years (possibly laddered)
  • a long term disability policy which will give coverage equivalent to 80% of his previous salary

All these goals are still subject to further evaluation on our part, so things may change from here once we really get going on this.

In summary, if you’re in the market for some policies, check out these tips.

Things To Note When Considering Insurance

#1 Buy insurance when you need it.
I keep receiving these advertisements in the mail for getting life insurance for babies or children. The companies claim that by picking up such insurance today, you are helping your children by getting them “lifetime” policies, especially if you sign up for those with cash value accounts. Stop, keep your money! Conventional financial wisdom doesn’t recommend us using insurance policies as savings or investment vehicles. If you want to save for your kids, use a 529 account or an educational trust; life insurance is for people who have dependents to take care of.

#2 Shop around for term life insurance, short and long term disability insurance.
Firstly, get term life insurance so you don’t have to worry about issues that surround fancier types of insurance such as this. Term life is just much simpler and more straightforward to work with. Obtain coverage from work and/or independent coverage. It’s common for people to supplement their employer-sponsored coverage with insurance policies they get on their own. Based on your needs analysis, you may realize you need more than what your job benefits offer you. Or you may decide you have enough of one kind of insurance, such as short term disability benefits that some states provide.

#3 Get it from a solid outfit.
When I initially shopped for insurance, I checked the quality of the insurance company behind it as well as the costs. From these, we made our policy choices. You want a solid company backing your contracts so that they can really pay out without hassle, once it’s time for you to claim the bucks.

#4 Get life insurance for at least the length of time required to cover your dependents.
If you’re expecting your kids to be out and on their own at the age of 18, then you may consider your policy to cover at least as long as that time period. I’m going to be a bit more conservative and go for coverage till my kids are in their late 20’s. But there are other reasons than this for us to keep such longer term policies, such as our need for liquidity and cash availability.

#5 Get life insurance if you need cash or liquidity to cover your family when you depart, regardless of your age. There are costs associated with someone’s passing and it would be helpful to a family if they have the cash to cover such obligations. Estate tax may also enter the picture for some, so this is how life insurance can be put to good use.

#6 Do you need more insurance the more kids you have?
It all depends on how much your expenditures would increase when you have more dependents to care for. Having one more extra child does not automatically mean you need to double your insurance. You’ll need to determine the incremental change in your expenses that a new child brings to the family. But it’s always a good idea to reevaluate your insurance needs after such a life change.

#7 Don’t wait to long to beef up your coverage since the cost of premiums depends on your age and status of your health. Another thing about insurance is that it’s one of those things that is best priced when everything is hunky dory. You end up paying more if you wait a bit too long. So in reality, I think the best time to buy insurance is when you really need it but when you’re young and healthy enough to command well priced, affordable premiums.

#8 Carefully think about who should own your life insurance policies.
Within our family, we own each other’s policies as it works that way the best for our estate plan. There are different ramifications (tax specific and otherwise) depending on who you give ownership to, such as if you have your children own the policies on your lives, so mull this over well.

#9 Look into your state’s disability insurance and what they offer.
A few states — including California, Hawaii, Rhode Island, New Jersey and New York — offer disability insurance benefits programs. California has its own state disability coverage so if you’re out for a short period of time such as 6 weeks, the state covers a percentage of your income. I’ve been disabled several times (mostly due to pregnancy) and I was happy to have had coverage from both my company and the state. But it’s long term disability you need to beef up on since many companies won’t give it to you for free. Mine has fantastic group insurance rates, so I’ve signed up for that. For my spouse, we’ll need to get it independently but I fear it will be out of reach and too expensive based on previous quotes I’ve received years ago.

#10 Insurance is variable and depends on many factors including your sex, age, health, activities, and in the case of disability insurance, profession. Because of this variability, the cost of premiums can be all over the map. Don’t be surprised if you end up having to pay more than your older sister does, for the same insurance. Like creating an estate plan, this is one of those things that you don’t want to procrastinate too long about.

-ooOoo-

If you are keen on getting insurance, make sure you read up on the details before getting quotes. Then you’ll be prepared to ask the right questions when you face a representative. The more you know, the less daunted you will be with making the right selections for you and your family.

Copyright © 2007 The Digerati Life. All Rights Reserved.

{ 29 comments… read them below or add one }

broknowrchlatr March 26, 2007 at 9:16 am

I agree with all 10 of your points. This is a great roadmap to determining how to manage insurance. The only thing I’d object to is the Replacement Income table. The assumptions of 4% inflation and 6% return are very conservative. Even funds for people who are retired aren’t this conservative. I think beating inflation by 4% is conservative enough. With that assumption, the numbers are a bit lower, even with the 100% income replacement. Concerning that: If one person is gone, expenses go down quite a bit. Your needed savigns goes down also. So, I’d venture to guess that 70% would retian the current lifestyle of most people’s survivors. With that, you are basically looking at 50% of the numbers in the table.

One additional point to mention is that you need to actively manage changes in your replacement income. Say you have 3 kids (ages 8,9,10). Your life insurance needs over the next 10 years is pretty high. But it probably dropps off significantly after that (by which time you may have significantly more savings). As such, a 10 year term insurance will get you a low rate now and then you can negotiate another term policy at that point, but with a benefit that is much lower. For me, I have a $1.2 MM plan now for 10 years. I plan to have no mortgage and significantly mroe savigns by then. So, I’ll be looking for a new plan at maybe $500k.

limeade March 26, 2007 at 9:47 am

I like your views on insurance. Insurance is only there for a financial setback you can’t afford.

Once you’ve accumulated an emergency fund or other savings, do you really need that $100 deductible, or will $1000 do? Every situation is different, but the underlying concept should be followed.

I also like what you say about keeping investment seperate from your insurance. You should have complete control of your investments and other assets.

Nice post.

-limeade
http://fiscalmusings.blogspot.com

LivingAlmostLarge March 26, 2007 at 2:42 pm

We are DINKS without any insurance except what is provided by the company. I’ve long considered getting insurance but DH won’t consider it until I get pregnant. So I don’t argue. Truth is that if either of us lost a job we’d still be okay.

Now about our term life, I’ve been pondering a lot because the amount people say to carry 10-20x your earnings seems like overkill for us. How so? Well according to your table we should carry 2.5 million at least on DH, and he’s on the bottom of his earning potential at 29. I’m 27, still in school and also at the bottom of my earning potential.

So I can’t imagine needing so much. What is more likely is that we’ll each get 1 million term of 25 years when I get pregnant. That way by the time it runs out we’ll be self-insured, which I thought was the point of term life insurance.

We’ll have paid for home, college done for the kids, and retirement well in hand, the money will be gravy.

What I find more difficult to calculate is disability insurance. But that’s a whole other calculation. I think short term might be unnecessary if you have say 3-6 months cash on hand. But long term definitely necessary. Depends on what your company provides.

But good food for thought. Now if only I could convice DH to buy life insurance. He tells me it’s the biggest scam paying to insure against dying, so his accounting professor says. But everyone has it. Ever wonder why the biggest, nicest buildings in the city is always an insurance building?

Silicon Valley Blogger March 26, 2007 at 8:09 pm

Love the feedback. I agree with Broke Now, Rich Later about the Replacement Income table. This table was reprinted from Motley Fool and is an interesting guide to see flat out what you’ll need if you ever have to replace your income (given some assumptions) exactly as is. But I believe there is room to maneuver here and Broke Now made some great points — the table DOES seem quite conservative and by considering 50%-70% of the numbers, things seem much more reasonable.

This input will help us in figuring out how much is sufficient plus help in making us feel comfortable that we’re on the right track.

Dave March 27, 2007 at 11:20 am

Great article! So many people just don’t understand their need for insurance…until it’s too late. Even couples with no children need insurance. With most couples, if one died the other could not afford the mortgage, bills, debt payments, etc. Life insurance can make sure you can.

Keep teaching them Silicon Valley Blogger!
Dave

plonkee March 28, 2007 at 10:30 am

This is great and reminds me that I need to revisit my disability insurance (I’m pretty certain of getting a pay rise in the next couple of weeks).

How long is short-term and how long is long-term, do you reckon?

Silicon Valley Blogger March 29, 2007 at 12:31 pm

Plonkee, got this from here:
Do You Need Disability Insurance?

Short-Term vs. Long-Term Disability

What’s the difference? Short-term disability insurance — also known as sick leave — kicks in as soon as you’re unable to work due to an illness, injury or the birth of a child. Most employers provide some type of coverage, ranging from just a few days to as much as one year. In some cases, the number of weeks you’re eligible for this benefit is based upon how many years you worked at a company. The longer your service, the more paid sick leave you’ll get.

Five states require employers to provide short-term disability. Hawaii, New Jersey, New York, and Rhode Island mandate most employers provide 26 weeks of coverage. In California, employers are obligated to offer 52 weeks.

Long-term disability insurance kicks in once your short-term disability benefits run out. Unfortunately, there are no state laws that require employers to provide long-term disability, but it’s estimated that half of all midsized to large firms do provide at least some insurance.

If you do decide to buy an individual long-term disability plan or to supplement your employer-based insurance, be sure to find out how much short-term disability coverage you have. There’s no reason to pay a premium for a long-term disability policy with a short elimination period of, say, 60 days when you have short-term coverage for six months.

Mike April 7, 2007 at 10:56 am

Cool post — here’s an excerpt from an article I wrote a while ago that kind of completes the info you provided:

When it comes to the most popular types of life insurances, these are represented by the whole life insurance and by the universal life insurance. As opposed to the previous type of insurance, these ones have are not limited to a certain period of time. The first one is the one that resembles the term insurance, with the specification that, in this case, the period of time refers to all your life. Some might say that this type of insurance comes with the highest rates (even though this fact depends from company to company).

The latter form of insurance, the universal life insurance is basically the most complex package you can get. In addition, this can be the most personalized package you can get. Basically, the universal life insurance is in your hands, meaning that you are the one who decides the sum above the premium. Your investment will be part of a cash-value account, which can have various usages. Another popular variant of this type of insurance is represented by the universal policy insurance which allows you to opt for investment vehicles.

The final type of insurance is represented by the variable life insurance. What does this mean? This is the type of insurance that provides for you a larger range of investment products, which can also include stocks. Basically, in this case, the beneficiary of the insurance can receive either the value of the insurance policy or the value of the cash account.

When dealing with these different types of life insurances, there is one thing that you need to remember, and that is that their names and titles might differ from company to company or they might depend on your location. Not all of us are specialists in insurances. Besides, they can even make us confused. But as long as you are informed regarding the available life insurance possibilities, you have nothing to worry about. Act ahead and choose the perfect insurance type for you!

Mike. S.

ProspectZone Insurance May 9, 2007 at 10:21 am

Good post … nice logical thinking. I’d be very careful when considering your life insurance needs, though. Various people use various kinds of math to come up with numbers, and I’d suggest that you need to come up with your own math to match your own situation. $5M is a lot of money … is it the right amount for your situation? The chart can’t tell you that.

Melissa September 11, 2007 at 8:04 am

Great article! Lots of good info here.

I agree that using an insurance policy for children as a savings vehicle isn’t the best way to go about it. But some parents do choose to get their children insurance for other reasons, perhaps valid ones.

A friend of mine’s parents found that a “black-listed” genetic disease ran in the family and that there was a chance their children could develop it as adults. They decided to get her and her siblings small policies when they were young to help provide a source of insurance for them if they later developed the issue. My friend did develop the problem and now that she has a family of her own she says she is grateful for that policy. It is the only life insurance she can get (outside of work).

I’m not saying that it is a good deal but it does provide her with peace of mind. It seems costly; I think she said it runs about $30 a month and I don’t know the details of the policy beyond that.

I understand this example is a unique situation but I thought it might be worth throwing out there.

disability insurance Canada December 10, 2007 at 4:03 pm

I cannot but agree with you. It is extremely important to take out a disability insurance. And the reason I am telling this is because 3 years ago my father had a car accident in which he lost one of his legs. He was the only breadwinner of the family working as an actor. My mum did not have a job because she stayed home with us. If it wasn’t for a Canadian disability insurance company where we took out our insurance I have no idea how would I now be a doctor. As you can see on the list above there are a number of disability or life insurances to suit your needs. And despite of what is sometimes thought it is not at all money down the drain.If you take out an insurance and survive :) than after a few years you get your money back. I honestly hope nobody will experience things like I did, but you never know…

The Term Guy June 30, 2008 at 9:08 pm

You missed one very important point in your list of must haves. And that’s the ‘Conversion Priviledge’. I appreciate and agree that the vast majority of people are better off with term – but that can change. And this ‘conversion priviledge’ that’s available *for free* on many but not all term policies allows you to move to a permanent insurance policy later by locking in your health status now.

Basically what you can do is in the future, trade in your term policy for a permanent life insurance policy, with the same company – without a medical. Now, that doesn’t sound like much..and it isn’t. Until you need it. then it’s everything. I recommend you only buy a term policy if it has the ability to convert to permanent later.

Here’s an example. You load up on your 30 year term to get through the kids/mortgage years. Sometime during that time you become uninsurable. Do you really want to let your term policy lapse knowing you’ll never get life insurance again? Absolutely not – insurance has moved from covering a risk to maybe a darn near certainty for you – it’s now a good bet. In that case, convert to permanent and you’ve got coverage for life.

arizona term life insurance July 15, 2008 at 7:20 am

Very good article. Here is another idea that maybe folks do not utilize. If someone takes out a 30 year term in their twenties and is still in good health in their thirties they can re-shop that life insurance around. Their are still great rates at that age, and the client re-extended their term out further, closer to retirement.

arizona term life insurance July 15, 2008 at 7:22 am

The prior comment has a good point about the conversion right.

Ben July 22, 2008 at 5:21 am

Thanks for the informative info.

Seems we’ve got a lot of folks with a lot of knowledge so here comes a curve ball(maybe even a knuckle-curve). How about No Cost Immediate Annuities For Seniors?

No way, you gurus say? Find out how seniors can obtain an annuity for life with no money or collateral required.

Viaticals August 21, 2008 at 3:14 pm

While I know everyone preaches term insurance you really have to figure in life events that are outside of dying at age 74 with a normal death. At least with a whole life policy you can cash in your policy on a viatical life settlement. No one likes to talk about such events, but it is something to consider when choosing whether to go term or whole life.

Silicon Valley Blogger August 21, 2008 at 3:26 pm

@Viaticals,

Yes, but you neglect to consider that the money you save by opting to go with term insurance can be invested, and you’ll probably be out way ahead with that money for your beneficiaries and heirs rather than if they wait for you to die and collect their benefits through a whole life policy.

You’ll never convince me that whole life is better than term insurance because you can save tons of money using term, which you can then apply to a proper investing program.

Whole life policies, as I know, are for those who’d prefer somebody else (the insurance company) invest their money for them, which in itself has the benefit of convenience (you don’t have to worry about investing yourself).

Viaticals August 21, 2008 at 8:12 pm

@Silicon Valley Blogger

While i agree with your point that money could be better invested elsewhere, we live in an imperfect world and the audience I deal with is mainly Americans who on average do not save unless it is through their 401k. I think as a broker you should look to whom you are trying to sell a policy and help them decide what policy is best for them. If the prospective policy holder does not have the discipline of saving already established then you could be doing them a favor pushing for a whole life policy which can be cashed out as a viatical or a lump sum payment.

Silicon Valley Blogger August 21, 2008 at 8:26 pm

@Viaticals,

Okay, I can’t argue with your points. That is absolutely true! Many people are simply not interested or willing to invest on their own for various reasons — no time, inclination or interest to do it.

If only more people knew how much they were giving up by changing some of their financial strategies, and if only they implemented improved financial strategies, then maybe we would have less foreclosures and more early retirees in the world ;) .

Alas, if only.

I agree with what you said. Thank you for pointing out this reality.

Glenn September 11, 2008 at 7:33 am

Viaticals said:
At least with a whole life policy you can cash in your policy on a viatical life settlement.

Response:
I think you may be incorrect with trying to suggest whole life insurance is better because you get viaticals. Viatical companies WILL also take term insurance policies.

The viatical company just uses the conversion priviledge (that most, but not all term policies have, included at no charge) to convert the term insurance policy to a permanent or whole life policy. Voila! You now have a whole life policy that the viatical companies will consider.

In short, term insurance in most cases (as long as it has a conversion priviledge) is not a barrier to viaticals, nor is whole life a benefit over term with respect to viaticals.

JGVFinance December 5, 2008 at 9:48 pm

I believe in this article and a good recommendation for people who doesn’t know much about how they go about their life insurance. Or people who would like to get themselves insured but hardly know the many different types of insuring. Like some people who just like to ask the question how much does life insurance cost and that type of questions about life insurance.
All 10 points and they are indeed good tips and guide. What i didn’t see is how to deal with 50s and over people.
And regarding whole life insurance, I would rather invets the differnce and instead buy a term life so that my beneficiaries do not have to wait until you die to get something for them.
thanks,
JGVFinance

JGVFinance December 6, 2008 at 11:24 pm

Regardig The Replacement Income Table.
My take on this is you have to purchase life insurance within the range of 8 to 15 times your annual income and it is basically a rule of thumb for me and many others that i know of. And by just looking at the numbers, it looks like within the range of 9 percent of your annual income.

I notice too that the calculation basis was set at 4 percent inflation which to me a little bit high. But then i guess it would be better if you have it higher than lower.

The safest if you can affor it is would be around the 10 to 15 percent of your annual income.
Thanks

JGV December 9, 2008 at 9:25 pm

According to Ben “How about No Cost Immediate Annuities For Seniors?

Well, this is very interesting stuff you brought up. would like to know more about it.

BTW, the article is an excellent one.

Thanks
Life Insurance

john fagan June 26, 2009 at 9:20 am

I wish I thought about the internet when I was purchasing insurance. I can truly tell you that getting many quotes from many sources is the way to go in today’s market.

Barth September 21, 2009 at 3:31 am

Yeah, Internet is a great source of quotes. In few minutes you can compare many companies. Internet is the future when it comes to market research.

SR22 Insurance Quotes September 22, 2009 at 12:21 pm

Something very important to consider when looking for a life insurance policy or a car insurance policy for that matter, is to check the insurance company’s rating. or example if you are in the market for a term life insurance policy that you are going to be paying on for the next 10 or 20 years you need to make sure that the company you are planning on getting a policy from is going to be around in 10 or 20 years.

Especially in tough economic times like these companies are closing their doors on a daily basis. It would be unfortunate to have invested 10 years in a life insurance policy and suddenly your spouse dies and you need to collect on that policy and the company you purchased it through recently went under.

insurance guy July 26, 2010 at 1:41 pm

if you aren’t comparing insurance policies online, you are really not using a gold mine of a resource.

My parents, being like most other old people, are very suspicious of the internet. They went around calling each and every company, looking up yellow pages for their health insurance lately when they could’ve found all these things with just a few clicks.

Mark August 5, 2010 at 4:53 pm

“#8 Carefully think about who should own your life insurance policies.”

For some reason we see people neglecting to do this all the time. I don’t know why but it’s really important to figure out what name to put down there and why you’ve chosen them.

Great post by the way… very thorough!

CDM August 15, 2010 at 5:27 pm

In your second point: #2 Shop around for term life insurance, short and long term disability insurance. This is a critical point with so many insurance companies and agencies, it is wise to compare prices. Remember too, it is the underwriter who makes the final decision.

Leave a Comment