Life Insurance

Do you need it?

The question to ask: if I died tomorrow, would people I care about suffer a financial hardship?

Likely yes:

• You have young children.
• You have a spouse who relies on your income.
• You have significant debts that would burden survivors.
• You have a business that depends on you.
• You're named in obligations (cosigned loans, alimony) that continue after death.

Likely no:

• You're single with no dependents.
• You're financially independent and your spouse would be fine.
• Your children are adult and self-sufficient.
• You have sufficient assets to cover any remaining obligations.

Life insurance is widely over-sold to single people without dependents and widely under-purchased by young parents. Match the product to the need.

How much coverage

Common methodologies:

Income multiples. 7–12× your annual income. Simple, though it ignores specific family circumstances.

DIME method:

• Debts outstanding
• Income replacement: years of lost income × annual income
• Mortgage balance
• Education costs for children

Add them up.

Needs-based analysis:

• Immediate expenses: funeral, medical, final bills (~$20k–40k)
• Debt payoff (mortgage, other)
• Income replacement for X years
• Children's education funding
• Retirement fund for surviving spouse

A careful needs analysis often lands at 7–15× current income for parents of young children. $500k–$2M face amount is common for middle-class families.

Term life insurance

Term insurance pays a death benefit only if you die during the specified term — typically 10, 15, 20, or 30 years. If you outlive the term, the policy expires with no value.

Advantages:

• Very cheap. A healthy 35-year-old can get $1M of 20-year term for $30–50/month.
• Simple. Pure death benefit, no investment component.
• Matches the typical need — 20–30 years of income replacement while you have dependents.

Disadvantages:

• No cash value. Outlive the term and you paid premiums for nothing.
• Premiums rise at renewal. Renewing at age 60 is much more expensive than original purchase at 35.

Term is appropriate for the vast majority of life insurance needs. Buy a 20- or 30-year term policy when you have young children; by the time it expires, children are adult and income-replacement needs are much lower.

Permanent life insurance

Permanent (also called cash value) life insurance combines a death benefit with a savings/investment component. Types include whole life, universal life, variable universal life. Premiums are much higher than term.

The sales pitch:

• Coverage never expires.
• Cash value grows tax-deferred.
• Can borrow against cash value.
• Premium doesn't increase with age (for whole life).

The reality:

• 5–10× more expensive than term for the same death benefit.
• Cash value grows slowly for the first 10–15 years. Much of early premium goes to agent commissions.
• Returns on the investment component are typically 2–4% per year — worse than you'd get investing term-vs-whole premium difference in index funds.
• Complex. Lots of policies with hidden fees and adjustable features.

When permanent insurance might make sense:

• Estate planning for very large estates. Second-to-die life insurance in an ILIT can provide liquidity for estate tax without increasing the estate.
• Special-needs dependents requiring lifelong support.
• Business uses (key person, buy-sell funding).
• You've maxed every other tax-advantaged account and need additional tax-deferred space.

For most families, term insurance plus investing the premium difference in index funds beats permanent insurance substantially.

Employer coverage

Many employers provide basic life insurance — usually 1–2× salary — as a benefit. This is typically cheap (often free) and useful but rarely sufficient.

Problems with relying on employer coverage:

• Limited amounts (1–2× salary for a parent of young children is often inadequate).
• Ends when you leave the employer.
• May be convertible to individual at higher rates, but nothing like the private-market pricing for healthy individuals.

Treat employer coverage as a small baseline, not a complete solution. Buy individual term on top.

When to buy

Life insurance is cheaper the younger and healthier you are. A 25-year-old in good health gets the same coverage for a small fraction of what a 45-year-old pays.

Common inflection points:

• Getting married (especially if financial interdependence begins).
• Having children. The biggest trigger for most families.
• Buying a home with mortgage.
• Starting a business with dependents on the income.

Don't delay. Health changes (diagnosis, weight gain, new medication) can make future insurance dramatically more expensive or unobtainable. Lock in coverage while you're insurable.

The medical exam

Most life insurance above small amounts requires a medical exam — blood draw, urine, basic physical measurements, sometimes EKG for older applicants. Results affect your rate class (Preferred Plus, Preferred, Standard, Substandard), which dramatically affects premium.

Accelerated underwriting (no exam) is available for younger applicants at lower face amounts, often at slightly higher rates. Worth considering if you need coverage quickly.

How Horizons uses this

The Insurance page in Horizons calculates your estimated coverage need based on your profile — income, debts, dependents, assets — and compares it to your existing coverage. Gaps are flagged; excess coverage is noted as an optimization opportunity.

Check your understanding