I’ve written in the past that when it comes to whole life insurance vs. term life insurance, choosing term life insurance is the easy choice. However, I haven’t really discussed when life insurance is actually needed. As someone who is going to be getting married in less than a year, I figured I would look at the necessity of life insurance for newlyweds.
Basically, term life insurance is the best insurance in most cases because it provides insurance against an unlikely event (i.e. death in the next 30 years). When you’re 30, dying before age 60 is an unlikely event and it should be insured against. Whole life insurance is an investment vehicle rather than an insurance policy. It’s most beneficial to have your insurance policies just insure you, and you can keep your investments in other financial vehicles. This is the basic reason as to why term insurance makes more sense than while life insurance.
But back to my real question. Is life insurance needed for newlyweds? And if so, how much is necessary? As a single guy, I have never had anyone who depended on me. If I were to die, my assets would be split amongst family and nobody would be financially hurt by my death. Once I become married, someone else will be depending on me financially for the first time. Here are the categories that need to be considered for a newlywed couple when determining whether term life insurance is needed.
Loans & Consumer Debt
Many people graduate from college with significant student loans these days. I graduated with $43k in student loans, although fortunately, I have paid these off now. However, if you or your spouse has significant student loans, car loans, or credit card debt, then this will be a factor in any determination about life insurance. If one of you dies, the other will need to extinguish this debt. Ideally, a life insurance payout would accomplish this.
Your housing situation will play a similar role as your student loans and other debt. If you live together in an apartment or other rental situation, then you do not have a mortgage that needs to be extinguished upon death. If you own a home together, you will likely want to make sure that the home can be paid off. If you were to live until the age of 55 then the home would likely be paid off. But if you die early, there is likely to be a significant chunk of the mortgage left to pay off and you don’t want your significant other to be foreclosed on or burdened by the mortgage. If you currently rent, but are looking to purchase in the next year or two, it may make sense to include this in your current calculation.
Raising children can be very expensive. While some expenses would decrease with the death of a spouse, childcare costs would increase. In addition to the normal costs of raising children and the additional childcare costs, the funding of an education fund for the children should be considered. If you currently have children, this should be considered immediately. However, if children are simply “on the horizon”, you can always wait and purchase additional life insurance later.
Type of Employment
The safety of your careers should be considered when purchasing term life insurance. If both of you have relatively stable careers, then you may not need as large of an emergency fund. But if your careers are riskier, you may want to include enough in your insurance policy to fund a greater emergency fund. With only one person left earning an income, a proper emergency fund becomes even more critical.
Current Financial Outlook
If you’re both going to be very diligent about saving and investing for retirement, this decreases some of the need for life insurance. However, life insurance is meant to protect from the risk of a spouse dying before you’re financial independent. No matter how diligent you are at saving and investing, if you die at 30, you’re going to be a long way from being financially independent and your spouse will need more.
Is your spouse attractive?
Okay, this is kind of a joke… kind of. Is your spouse likely to remarry is you died? Or would you likely remarry? While it’s kind of grim to think about, it’s a reality that needs to be considered. If you remarriage is out of the picture, then you’re going to need a greater policy.
In less than a year I’ll be married. My wife will be working and will be earning enough money to support herself. We do not have any debt, and we will not have any kids at that time (nor we do intend on having them anytime soon). We also have enough savings to cover funeral expenses. Based on this assessment, I don’t think it makes sense for us to purchase life insurance on each other at this point. Until we have some of these items, or until we’re about thirty, life insurance is probably unnecessary. However, for peace of mind, we could consider getting $250k policies for the time being.
When I am ready to purchase a real policy I’m going to have to determine what policy amount and term to get. If I get the policy under 30, I’ll probably look at a 30-year fixed term. If I’m over 30, I’ll likely go with a 25 or 20-year term. I do intend on being financially independent by age 45, so a 20 year term might make sense in any circumstance. To determine the amount of insurance I need, I’m thinking that I’ll use some form of this calculation:
+ Combined Debts (mortgage, one car)
+ Children’s College ($250k x number of children)
+ Children’s Weddings ($35k x number of children)
+ Salary Replacement (Salary x 10yrs)
For now, until we are more dependent on each other, I think we’ll skip life insurance. I don’t really want to pay for something that we don’t need. But it’s definitely something that I expect to purchase before we’re thirty so it’s important to start thinking in that direction now.
(Image: Pinterest – FYWI)