Term Life Insurance Coverage

Formulas like that are pretty worthless. First you have to ask yourself what the insurance is for. Then figure out how much money will fix the problem that the insurance is meant to solve. If your income is $100,000 but you have an investment portfolio worth, say, $2million, it's entirely possible that your only "need" for that insurance may be to help with potential estate taxes, not because the folks you leave behind will be strapped for cash.

If you wanted insurance to provide a permanent replacement for your current income, you could argue that it ought to be as much as 25 times your income. If you only want that insurance to provide money to replace, say, 10 years of your income, you actually might do just fine with even less than 10x your current income (on the assumtion that most of it will continue to be invested and grow).

Neither formula answers the question. What are the expenses you need for that insurance to pay for in your absense?

Some things folks often take into consideration - for the working spouse, salary-replacement. For the spouse who is not earning a salary (I hate to say non-working), money to pay for daycare and/or a nanny, etc. etc. Folks often want to make sure that the house can be paid off so that the surviving spouse has one less huge ongoing expense (mortgage) to contend with. Other things you may want to fold in are expected college expenses so that, again, the surviving spouse has one less ongoing expense (saving for college) to contend with. Neither your mortgage nor college expenses necessarily have any specific relation to your current salary.

Anyway, while there are some other things for which folks can often get by with a quick rule of thumb, life insurance is not a great one to fake it with.

Even if you're going to compute income replacent rather than needs-coverage, the computation is still not a simple multiple of your income, and it's rather inadequate when used for non-income producing spouses (or even for income-producing ones who contribute in ways beyond the salary).

When we bought insurance we didn't use a standard formula. Because both of us work and earn essentially the same amount, either of us could sustain the family if the mortagage were paid off and college paid in advance. That's what we based our coverage on and we're confident that it's adequate in our circumstances.

We're covered individually for the same amounts. Should we both die, the kids get that plus equity in the house. It's more than enough for our designated relative to see them through college and give them a boost after that.

That would be times 1.6, not double.

I count four "should's" in your message. There is no right amount you "should" carry, just what matches your comfort with risk, which only you can determine.

Will you and your spouse unexpectedly die together, or just one of you? Should the lifestyle of surviving orphans and widow(er), if any, go up, down, or stay the same? Should government payments and college aid be relied on? Will there be a re-marriage, or other relatives available and willing to help raise orphans or single-parent children? The list goes one...

What amount of term life coverage do you have now? Why do you think you should change it? Have you accomplished the more difficult task of talking with and selecting, in a legal document, a designated guardian for your children? How much coverage does that person think you should have?

Take the two formulas you read, and apply a formula which averages the two results (13 times annual salary), then make a change only if your current coverage is more than 20% different from the result.

-Mark Bole

Neither one. Decide what would make you feel comfortable and go with that. Every one is different. Some spouses will spend the insurance money like drunken sailors and some may be very frugal. Thumper

Mark and others:

Thank you for the responses.

I should have conveyed that I understand that there are no hard rules concerning how much coverage people should have. Currently, I make

72K/year and have 500,000 in coverage. My wife works and makes almost the same exact amount annually and also has same amount of coverage. I feel that we are under-insured by either one of my previously stated formulas and I guess I look at life insurance like this: If something happens to one of us, we can raise the children under the same standard of living as well as include college for them. Also, if something happens to both of us, the couple we've designated as whom our children would go to, would also be able to raise them on the same financial level.

I understand that the answer to my question isn't straight-forward, but I am currently not comfortable with our current coverage.

This is an invaluable forum. Thank you for the opinions.

HH

How much of that "spouse spending like a drunken sailor" can be dealt with via an irrevocable life insurance trust? If the trust, rather than the spouse, is the beneficiary of the insurance policy (usually done for long-term minimze of estate taxes, but still...) - do the provisions in that ILIT, especially if the trustee is a third party - help keep that kind of spree spending from happening?

Standard clauses usually go something like "health, education and general welfare" of the beneficiaries, so if the trust says the surviving spouse may take money for that stuff and anything left over goes to the kids when they turn, say, 25 or so, the surviving spouse may access and use the money comfortably, but is going to have to justify or at least explain expenditures to the trustee. [or so I understand - anyone here with practical experience of these things - I'd love to hear how they work out - thanks!]

Personally, I can't spend time worrying about how my spouse would spend the insurance benefits. The money is left to her for the benefit of my family at large. Whatever's left when the kids graduate college is hers, not theirs. If we're not financially compatible now, we shouldn't be married.