Life Insurance: More dependents, more premium

“The only rock I know that stays steady, the only institution I know that works is the family.” – Lee Iacocca

With the birthmother due in mid-December, our baby’s arrival is just around the corner. We saw her over the long weekend and if looks are the last signal, then it could be any day now. Jeanine and I came home and blitzed the house in final preparation.

We’re geared up: Yesterday, a friend stopped over with her 7-month-old and when it came time to change her diaper we took the nursery for a trial run. Our set up worked perfectly and appears to be adequately equipped. One diaper down!

There are a few other loose ends… mostly the kind that involve paperwork. Upping our life insurance policy is one of them. When I was single, I never carried life insurance because I had enough in savings to cover the final expenses to put me in the ground.

After Jeanine and I purchased our current home, we became more financially intertwined (thus dependent on each other) and this is when we first bought life insurance policies. It was term insurance… don’t get snookered into buying whole life. After all, the purpose of life insurance is really just to keep a person financially afloat if his or her partner passes on. Life insurance is meant to buy someone time… preferable enough time to cut expenses or find another partner that would bring in the missing income. Jeanine likes to remind me that the additional income scenario sounds better to her than cutting expenses. Apparently, we are all replaceable!

Now with the baby on its way, this topic seems even more important and begs the question: how much insurance do we need? Just like with retirement calculators, there are different formulas for figuring out the right amount. Trent Hamm at The Simple Dollar writes:

If you have child dependents, though, that’s when you really need good life insurance coverage. Take out a sheet of paper, find your last Social Security benefits statement, and do this calculation: calculate 90% of your salary, subtract your dependent Social Security benefit from that, then divide that amount by 0.08. That number is roughly what you should have in life insurance if you have any dependent children.

Here’s an example. Freddy has a wife, a child, and an $85,000 a year job. His Social Security statement reveals that his dependent benefit is about $11,000 a year. So Freddy calculates 90% of his salary ($76,500), subtracts his dependent’s benefits (leaving $65,500), and divides that amount by 0.08 to get $818,750 in term life insurance.
Using Trent’s method, my calculation is three times more than the policy I currently have today. And Jeanine’s policy is half the amount that I have. We figured since I travel worldwide for my job, there is a greater risk of tragedy for me (e.g. consider the recent events in Mumbai). Jeanine dislikes talking about these matters… but I’m practical and a realist and it actually makes me feel less uneasy about the unknown knowing that we have planned properly. For Jeanine… this conversation just leads to the hebejebes.

But it’s really important to discuss and take action; especially now that we have this tiny bundle of joy completely dependent on us. Yes, we’re under insured and I’ll be calling our State Farm rep this week. That said, the amount we need is varies widely depending on the person dishing out the advice. For example, Suze Orman suggests:

Most people should get a 20-year level term policy that has a value equal to 20 times the amount of annual income your family needs to live securely.
Twenty times my annual income? Other personal finance authors say at least 8 times your annual income. So what’s the right amount? I’m curious to learn what other parents have done so please feel free to comment below.

In closing, I was searching GetRichSlowly for J.D. Roth’s take on this topic and found this guest post that came with a different reminder:

You are more likely to get sick during your working years than you are to die during the same period, so take care of that first.
So this means I should really be thinking about my disability insurance first or at least in parallel. How much disability insurance do we need? Is the offer that I get from employer enough? Probably not, since short-term disability benefits are typically better than the long-term ones. One more thing to add to the list of baby preparation… but it’s a list I’m happy to make! We are so excited about the arrival of our little dependent. Life is good… even when it requires paying for more insurance!

Photo credit: stock.xchng.