My wife and I recently had a baby, and now we want to do the responsible thing and get life insurance. We are both professional women in the mid-30s and hope to buy a home in the next three years.
Assuming that our mortgage will last for 30 years, it seems reasonable to buy life insurance for a period of 30 years, ensuring that none of us are left with years of mortgage payments that it will struggle to satisfy on an income if the worse.
However, most life insurance deals seem to last 20 years, and making a longer period makes the monthly payment steeper (and they are not already cheap due to some health problems). An agent with whom we spoke about our desire for adequate coverage on mortgage maturities said that the thing to do is to overlay different policies on each other: buy a 20-year policy now and add a & # 39; other 20-year policy in 10-15 years.
I'm not sure that's good advice. I think in 10 years we will be older and we may have new health problems, raising the prices of all the new policies we add. However, I wonder, 10 or 15 years of higher monthly payments could now be more money than we would later pay for a more expensive policy?
-Baffled New Mom
Morbid thought for the day: every year your life becomes more expensive to insure because every year you approach death. Life insurance premiums reflect this reality.
So I think your instincts are perfect here: with life insurance, the rule of thumb is to block premiums while you're young.
That said, buying long-term life insurance policies could save you and your wife money, but not in the way you take it out.
Your life insurance must change over time. You need more when you have dependent children, but less when the children have finished college. When your mortgage is paid off and you are approaching retirement age, you may not need it at all.
An option would be for you and your wife to get quotes for two policies (four in total): a 20-year policy to get the surviving spouse in the years you will continue to provide your child and a second thirty-year policy that would cover the your half of the mortgage. By limiting the longer term benefit to your mortgage liability, you can reduce the cost.
The downside is that this strategy, often referred to as the life insurance scale, works best when life is fairly predictable. If buying a house lasts up to three years, it is difficult to determine how much life insurance you would need to cover your portion of the mortgage. Also, if you plan on having more children, a 20-year policy will probably not be enough.
If your life plans have a lot of uncertainties, this could be one of those situations where it's worth sacrificing the extra money to ensure that your family is protected in the worst case scenario.
But you must also be prepared for a scenario that is no worse, but more likely: if you or your wife become disabled?
The cost of a disability can be particularly devastating for a family. The loss of income is usually accompanied by higher medical costs.
Assuming that you do not have an unlimited budget to allocate to insurance, it is essential to give an overview of the scenarios that could be faced when deciding how to protect your family. This could mean that you buy less life insurance coverage so that you can also afford a good disability policy.
Sure, it's great if you can afford a policy big enough to meet all your family's financial needs for decades, but most people can't. You don't want the rewards to be so high that you can't afford to save on emergencies or retirement.
I know I just made the subject of insurance even more puzzling for an already baffled new mom. Sorry.
Your life insurance must not exist in a vacuum. On that note, you and your wife would likely benefit from meeting with a financial planner, who can help you prioritize your insurance needs with other goals.
They can also help you overcome other puzzling economic challenges that you will face as new parents, for example by saving on soaring college costs.
Robin Hartill is the senior editor of The Penny Hoarder and the voice behind Dear Penny. Send your hard money questions to (secure email)
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