Owning term life insurance is pretty much a must for anyone with dependents. Life insurance is intended to make our family financially whole if we die. We don’t want to leave a devastating financial loss on top of the emotional one.
The importance of mitigating a family’s financial burden is even more important in the case of Americans living abroad because the dependents of expats will likely face extra costs and complications.
Whether home or abroad, the need for life insurance tends to have a somewhat predictable development or lifespan.
Different levels for different phases of life
Making your family financially whole begins as a simple matter if you are married with no children. Your term life insurance should be enough to replace your earnings so your spouse can get back on his or her feet. It should also cover the costs of a funeral and possible repatriation.
Getting back on his or her feet isn’t nearly so uncomplicated if children become a part of the family. Your term life insurance should adequately replace your income and also include funds to raise the kids, give them a college education, and maybe even pay for a first car, a wedding, or other things that you hold to be essentials.
Once your kids are through college and get married and your spouse draws closer to drawing Social Security, the need for life insurance lessens significantly. That assumes, in part, that you’ve adequately saved for retirement.
If the need to provide for your family has lessened and you have a good retirement nest-egg, you should be able to lower the amount of insurance because your need for life insurance is approaching the end of its lifespan. That’s particularly helpful because life insurance starts getting more and more expensive after you turn 50 and really unaffordable at age 70.
How much is enough?
Only you can answer the question of how much life insurance is ideal for your situation. As a rough means of calculating your need, Andrew Beattie discusses the salary-based method, saying…
Most insurance companies say a reasonable amount for life insurance is six to 10 times the amount of annual salary….
[On the other hand,] the standard of living method is based on the amount of money the survivors would need to maintain their standard of living if the insured died. You take that amount and multiply it by 20.Investopedia: How Much Life Insurance Should You Carry?
Each family’s situation is a little different. If you inherited money or saved a huge amount, you probably no longer need life insurance. However, if you have significant amounts of debt, your need will be greater.
Life insurance has a lifespan. Our need for insurance may grow over time as our family grows, decrease as we save and as the number of our dependence decreases, and possibly disappear completely at some point.
Some expat considerations
Americans living abroad have even more issues to ponder, and they may face additional expenses if death occurs.
Will we want the physical remains to be returned to the USA? What will it cost to close up our home abroad and repatriate the family if that is desired? How much greater or lesser will the family’s standard of living cost in the US as opposed to our current situation? How will they be housed if they return to the US where, presumably, they don’t own a home or have employer-provided housing?
There is even the very practical question of where to buy your term life insurance. There are many insurers abroad that are hawking their wares, good or bad. There are also large and small, solvent and not-so-solvent insurers in the USA that are happy to write you a policy. One thing is certain: You’ll want to have your insurance specify in writing (preferably in the policy or one of its riders) that you are covered both in your passport country and in your host country or countries.
It will likely cost you some time to find an insurer who will guarantee such international coverage and possibly some extra money, but this is one area in which we want to take no unreasonable risks.
In my mind I want my spouse to be comfortable and to never worry about money if I die. I want her to be able to pay off the house and live comfortably drawing my Social Security with our 403(b) amount there to supplement it. I carry term life insurance on both of us because I want to cover all the cost to be incurred when one of us dies such as a funeral and not working for a period of time.
Ideally, by the time I retire I shouldn’t need life insurance except a small amount to cover the expenses of a funeral. Even so, I’ll keep a modest amount of personal life insurance because if I retire, change employers, or cut back to part-time, I’ll likely lose my employer-provided insurance. Keeping a small amount might be prudent unless I consider our savings to be adequate to cover any anticipated and unanticipated expenses.
That’s my plan for the lifespan of my life insurance. What’s yours?
The Vice President of Finance for Pioneers, graciously wrote this post for Vagabond Finances. Mark Mason contributed to this post.