How much life insurance should a teacher have?

If you talked about death all day, and then lost respect due to some shady products that had you sold, would you like your job? No, but someone has to do it…..

The Life Insurance Agent: They have various different types of life insurance they can sell, but how do you know which one is right for you? Once you’ve found the right product, how much should you buy?

Life Insurance

Do I need life insurance?

Are you married, have children, a mortgage, or other outstanding debts? Chances are you need some life insurance to assist your dependents should you pass away. (If you don’t have some of those things, you may NOT need life insurance – not every one has a need).

Take a typical family – husband, wife and two kids. If the husband passes away, the wife is left with one income to provide for the three of them. One income to pay for everyday expenses, save for college, two growing children and fund a future retirement. If there was a lump sum of money available to cover most (if not all) of these costs, that would be ideal.

Life insurance was designed for this primary need. Over the course of time, it has evolved into many unnecessary products that have become lucrative for the agents selling it, and not a great fit for the person purchasing the policy.

I get some coverage from my school and associations: do I need more?

Some school districts offer insurance based on your employment, but I have rarely seen this to be larger than $50,000. (There are tax reasons for this, which you can read about here). Some administrators get more based on their specific contracts, but this is rare.

If teachers are members of the NEA (or other local / state teaching organizations) there is an optional life insurance benefit available through them, with benefits being around $100,000 in term insurance.

But a total of $150,000 is rarely enough for most people. Many people need at least $500,000 in coverage to cover their family’s future costs, lost income and lost retirement savings.

How much do I need?

This depends on who you are, what life stage you’re in, what debts your have, and what goals you’re working towards! It is a custom situation for everyone, and one size rarely fits all. Most financial professionals use calculators to determine how much insurance people should be buying – here’s one of my favorites.

For many people who are trying to use a rule of thumb, you should aim for between 10x-20x of your annual salary in coverage. But of course, this can be a wide range, so some custom analysis is always the best way to go.

Once you have an idea of how much you need, the cost of getting this insurance can vary widely depending on the type of insurance you buy.

What kind of insurance to buy?

There’s two kinds of life insurance: Term and Permanent

Term – this is purchasing pure insurance for a period of time. If you are 30 years old and want to insure yourself until you are 60, then you’ll purchase a 30-year term policy.

A level-term policy will keep the premiums the same throughout the 30-years (recommended), but once you reach 60, that insurance will go away (or get a lot more expensive). This insurance is as cheap as you’ll find, as it expires and is a no-frills kind of policy.

Permanent – this is where the life insurance game gets played. Permanent insurance comes in various forms – Whole Life, Universal Life, and Variable Universal Life. These are variations of a life insurance policy with a savings account (“cash value”) attached to it. Whole Life policies have a fixed amount of growth to the cash value (i.e. 4%).

Universal Life can assign this savings to a stock market index so it has the potential to grow faster or do a fixed rate of return. It also provides a lower premium than whole life. Variable Universal Life allows you to invest the money in the stock market through mutual funds to build up the cash value.

These policies can get confusing very quickly, and there seems to be a limitless amount of riders (additional benefits) that can be added to these policies. For the most part, they do not have a place in many people’s financial plan, as the price to get adequate coverage is cost prohibitive. However, this doesn’t prevent them being sold to as many people who can buy them (the commissions on these policies are bountiful).

Who do I buy it from?

If you have an insurance agent that you work with, many of them are qualified to sell life insurance. However, make it clear that you want a term policy and not a permanent insurance product. Even better, work with a broker and they can shop the best life insurance companies for you to get you the best product.

You may get told from insurance agents that you can use a permanent policy as a “bank” in the future, or borrow from the cash value for your expenses. You can also find out that life insurance can be bought on young children who may get sick in the future and not be eligible for coverage. While the stories of this sound great, they rarely turn out as great as the illustrations show. Buy insurance for insurance’s sake, and then invest somewhere else.

What do you recommend?

I’m a believer in “buy-term-and-save-the-difference”, which refers to paying a smaller premium for pure life insurance and saving the difference between this premium versus a permanent policy.

In buying term insurance you get the correct amount of coverage and nothing else. Life insurance is not meant to make people rich while they’re alive, so by having a savings account tied to the policy rarely makes sense for most people. Once the term insurance expires, then there should be savings and investments in place that will support dependents should the insurance holder pass away.

Still not sure how much you need, or what kind to buy? I do full insurance reviews for clients, so feel free to get in contact if you’d like help.