How Much Life Insurance Does A Frum Family Need?

April 11, 2019

Taxes & Insurance

Four million dollars seemed like an unimaginable sum to Yehuda Fine. This was the proposed amount of term life insurance coverage that a broker had recommended to protect him and his family against the financial damage should he chas v’shalom die young. Yehuda earned about $100,000 annually and, together with his wife’s small salary, this was enough to support their family and save for future needs like weddings.

The 30-year-old father of four didn’t expect changes in their future expenses, so purchasing a policy worth 40 times his income seemed like a waste of money. He was leaning instead toward a $1 million policy, which was much cheaper ($850 annually vs. $3,235), but the broker insisted this was way too little. Who was correct about how much life insurance he should buy?

Two wrongs don’t make one right.

While the insurance salesman is correct that one million in life insurance isn’t very much for many frum families, his $4 million proposal is absurdly high. Insurance is about guarding against an unaffordable loss, which in the case of life insurance can be decades of potential income.

Most people’s largest asset is their ability to earn decades worth of salaries and profits (known as their personal capital). Consider if an investor offers Mr. Fine a lump sum now in exchange for the rights to all his future earnings; how big a check would Yehuda expect? With 40 years of potential $100,000 revenues ahead of him, he certainly wouldn’t sell it all for just $1 million, but would probably do so gladly for $4 million (he could take that money and easily double his income while keeping the principal intact, i.e., $4 million x 5% = $200,000). Because life insurance protects against the loss of all that potential income, it should be sized according to it, and the number is more than one million but less than four.

A million isn’t what it used to be.

Since his wife and young children need his salary to survive financially, Yehuda must insure his personal capital against the catastrophic loss his family would face should he die prematurely. And although a million dollars may sound like a lot of money, Yehuda’s potential earnings are worth a lot more than that.

But more importantly, his family may burn through that seven-figure sum pretty quickly should he pass on. Even accounting for some investment gains earned on the lump-sum insurance payout, after about a decade, a widowed Mrs. Fine would probably run out of money. Unless she would either cut her expenses or quickly find a spouse willing to share in her financial burden, her anguish may be compounded by economic worries. If Yehuda wants to try to avoid that possibility, he shouldn’t skimp on his policy size.

But 40 times one’s income is excessive.

While a million in life insurance may not be much, 4 million seems ridiculous in this case. The broker naively, or perhaps slyly, just multiplied $100,000 by 40 without taking into account investment income and the fact that over time, the dependents will move on. Salespeople often seem to think that if a little is good then a lot must be better, but this isn’t always the case. There is usually a trade-off, and buying too much life insurance means there is less money available for daily living or saving for other needs, such as retirement.

While Yehuda should protect against the chance of premature death, perhaps he will live longer than expected! If he doesn’t put away money for old age, he may find himself thankfully alive but destitute. Unless someone is rich, it is definitely possible to have too much life insurance.

Two million sounds right.

A $2 million life insurance policy should generate $100,000 in perpetuity, which will provide for the Fine family comfortably in case of Yehuda’s premature passing. Even if a widowed Mrs. Fine would dip into the principal here and there, as her children grow and move out, she will need less money to provide for them. The balance left after marrying off the kids should leave plenty to help supplement her future income.

Brokers may be overly aggressive, especially since the larger the sale, the more the commission, so it’s worth stopping for a reality check before signing on the dotted line. It’s hard to see how Mr. Fine requires a $ 4 million policy for himself, and the broker, by overshooting, probably lost a customer.

Perhaps a his and her policy is best.

While the broker was too aggressive in protecting Mr. Fine, he left a gaping hole in coverage by not considering Mrs. Fine’s personal capital. Even ignoring her modest salary, the financial value of taking care of a home and young children is much greater than many realize and would be greatly missed in case of a tragedy. A homemaker is also usually the family’s housekeeper, cook, nanny, tutor, social worker, seamstress, personal shopper, interior decorator, party planner, psychologist, day camp director, chauffeur, etc. etc.

Should a husband be left trying to pay people to do all the things a wife and mother does, he would probably find that it costs him $50,000–100,000 a year, depending on the size of the household! Mrs. Fine, therefore, can probably use $500,000 to $1 million worth of “eishes chayil” insurance on her life to protect against the financial damage should the worst occur. While buying too much coverage isn’t good, carrying too little is even worse.

Shop Online First

You can easily quickly compare rates for term insurance (you almost definitively don’t need or want whole-life) online here term4sale.com or geico.com/life-insurance and use that as a baseline for conversations with brokers. The sites also include calculators for estimating your potential needs. Brokers can still hold your hand and prevent you from overlooking things but come to them as an educated customer.