Don't Be a Jerk. Buy Life Insurance.
Last week, I wrote about New Jersey's changing divorce law and asked a basic question: Should we structure family law to reward spouses who step back from their careers in order to support the family, or should we discourage it? Andrew Sullivan noted my piece, along with a powerful response from a reader whose husband had died unexpectedly in his mid-50s. "Pensions are reduced for widows and cut further when the pension holder dies before retirement age," she wrote. "Social Security isn't much help for younger widows who earn a disproportionately smaller share of the family income. Even though he had life insurance (I insisted), and we had retirement funds, I am facing a rocky retirement that began earlier than expected after my dead-end job laid me off just after I turned 60."
This is not necessarily an argument against prioritizing one career. It is, however, a useful reminder for everyone: If one spouse earns a lot less than the other, you need lots and lots of life insurance. If you are in this situation, and you do not have large amounts of life insurance or a multimillion-dollar nest egg for your spouse to live on, then you need to run right out and get some immediately.
OK, wait, you can finish reading the article. But as soon as you are done, you need to go buy enough life insurance to leave your spouse sitting on a tidy pile. I know, I know -- it's an expense on top of all your other expenses and you just can't see your way clear right now, plus you're healthy and it's not urgent. Let me just point out that it will be even more costly for your spouse if he or she is suddenly missing your income with the mortgage due and a few thousand dollars in the bank.
Term life insurance, which is what you should buy, is pretty cheap. It's especially cheap if you buy it now, when you're young ... or at least younger than you will be when you finally get around to buying life insurance. And while I know it's scary to think about your own death, I promise that buying insurance will not actually hasten that dark day. It will just ensure that your spouse isn't impoverished when that day arrives.
I understand you may find it daunting. How much insurance do you need? Where should you buy it? Here are some things to think about when you make the purchase.
- Stand firm, buy term. Do not go to an insurance agent, who will try to sell you some sort of complicated product. These go under various names -- "guaranteed return of premium," "whole life," "universal life." All of them are also known as "a bad deal." You don't need insurance that doubles as a savings account; you need insurance that functions as actual insurance, providing a safety net against the catastrophic loss of your income. That's called "term insurance," because you buy it for a set number of years, and then it expires. You won't get any money back at the end, but the premiums are much lower. If you just pop the difference into a mutual fund every month, you'll come out well ahead. The only people who benefit from whole life insurance are engaged in complicated estate tax arbitrage, and if you are rich enough to need whole life, you probably don't need it for the insurance.
- Factor in future raises. If you're 40 and buying insurance, you're probably not going to want to try to buy another policy in 10 years, because insurance starts to get expensive in your 50s, especially if you develop a health problem between now and then. So remember that the next 15 years are likely to be your peak earning period, and factor in the loss not just of your current income, but also your future, higher income, and the retirement funds you'd expect to save out of it. That will keep you from having to go into the market again at 52 to buy more insurance. You may also want to adjust for inflation, though at current rates, I wouldn't adjust much.
- Think about how long your spouse will need the money. Say you are a 35-year-old high-paid lawyer, and your spouse is a social worker. They're not going to top up their insurance by going back to work; they are working, at something that doesn't pay well. If you die suddenly at 42, they're probably going to be left with a much grimmer financial future than either of you expected, especially if you have kids at home. You need a longer term on your insurance and an amount that will replace your income while protecting against inflation. That means your spouse can't touch the principal, or even all of the return -- which in turn means it needs to be a pretty big pile of cash.
- Use an insurance broker. Sites like AccuQuote and Zander let you shop for policies from multiple insurers. But don't just go for the cheapest rate; make sure it's a highly rated insurer, information that is easily available online.
- Know your state's guaranty limits. Basically, each state has a reinsurance pool that guarantees at least a portion of your policy if your insurer goes out of business. Find out what that limit is, and if you'd be over it, split the policies up between two companies.
- Be reasonable. Now that I have encouraged you to buy a ton of insurance, one caveat: Insurers are not going to want to write a $4 million policy on someone who earns $40,000, which seems like an invitation to fraud or spousicide. If you have a nonworking spouse, or one who makes substantially less money than you, then you probably need at least 10 times your annual income in insurance. But insurers will not let you push that to unreasonable ratios, and neither will your budget.
- Don't lie on your application. It's tempting to shave some of the stats or maybe not mention a recent diagnosis in order to get a better rate. This is stupid in multiple ways. First, an insurer will generally want to give you a medical exam (or charge you an exorbitant rate). And second, if they find out you lied, they can cancel the policy or refuse to pay out.
- If you're uninsurable, don't panic -- save. Some people are not able to buy term life insurance because they have a pre-existing condition that makes them a poor risk. (You didn't think health insurers invented pre-existing conditions, did you?) If you are uninsurable and your spouse has limited earning power, then you need to put more of your income toward savings than someone with a nice, comforting pile of insurance money behind them. If you make it to 62 without dying or getting divorced, I give you permission to use some of that pile to go on the most amazing vacation in the history of the planet. But don't boost your lifestyle now at the risk of leaving your spouse impoverished.
If one of you wants to choose lower-paying work or take time off to devote to the home, then that's great -- as long as the numbers work for your budget. And those numbers have to include a nice, fat insurance policy to ensure that the numbers keep working even if the worst happens.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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