How much life insurance?

[Gas_Doc]

I'm finally getting around to getting a term life insurance policy and I'm looking for help with the amount and term of a policy.

Here's my current state:

- 32M, completely healthy, no meds, no significant family history (parents alive, grandparents all lived past 80)

- Married, no children (but planning on 2 or 3)

- Job: $250k/yr now, likely around $500k/yr when partner in 2 years

- House: $400k left on the mortgage, house valued at $650k per Zillow (for whatever that's worth...)

- Finances: no debt besides mortgage, wife could go back to work in healthcare if need be but currently isn't working, $250k in retirement, saving 20+% gross annually, life in a major city but medium overall COL area

 

I guess I'm wondering how much insurance to get given my current state of "married without kids" but with plans to have children in the immediate future. Also, I'm looking at a 20 year time horizon for being financially independent and no longer needing to be insured, but I also think I'll need a lot less coverage in 10 years.

 

I was just throwing a number out there like a $2 million policy over 10 vs 20 years (if I went 10 years, I'd reevaluate our financial situation and adjust the policy amount with the new 10-year policy). What do you think?

[The White Coat Investor]

Good for you for doing this.

You didn't mention the most important variables- how much you spend. Well, I guess you did- $200K including taxes. Portfolio is still small and still with a good sized mortgage. So you basically need enough insurance to support your spouse +/- kids for the rest of their lives. Let's call it $150K a year. Multiply by 25, that gives you $3.75M. You probably want to have something for college and to pay off the mortgage, so I'd round up to $4 Million.

So either a $4 Million 20 year policy or maybe a $2 Million 10 year and a $2 Million 20 year is what I'd probably get.

$2 Million, of course, is way better than nothing but it seems a little low to me given your situation. This stuff is so cheap it seems silly to be low.

[PhysicianOnFIRE]

The White Coat Investor wrote:

maybe a $2 Million 10 year and a $2 Million 20 year is what I’d probably get.

Click to expand...

This is smart.

If you kick the bucket in the next ten years, your family gets $4 million plus your retirement savings and home equity. After 10 years, you'll have decent retirement savings, so $2 million plus your nest egg should be adequate.

I wouldn't wait 10 years to reevaluate. In all likelihood, it'll cost more and you don't know what your health will be then. Buy all you need while you're young and free of chronic disease.

Oh, and I hope you never cash in!

[Gas_Doc]

Thanks for the replies guys. I like WCI's idea of tandem 10 yr and 20 yr policies. We definitely spend less than $200k/year including taxes, but honestly I should calculate the exact number. The plan right now is for my wife not to work (or just work casually) while our kids are young. She could always go back to work if I died, as her former boss has told her there is always a job waiting for her if she wanted to return. Additionally, we have a strong family support system in our city that would definitely help with childcare should it be needed.

 

With all that said, $4 million still seems like a lot of money, but I'm glad all of you have opened my eyes to a higher dollar amount that my initial assessment. Then again, putting my stats into term4life.com, a 10-year $2 million policy is only $33.30/month, while a 20-year $2 million policy is just $64.44. Less than $100 per month for a sliding $4 million-to-$2 million 20 year life insurance plan could really help me sleep at night...

[PhysicianOnFIRE]

If $4 million seems like overkill (it would for me, too), you could do a $1 million 10-year policy and a $2 million 20-year policy.

That would give your family $3 million over the next 10 years, then $2 million for the remaining 10 years.

 

[Scott at MD Financial Services]

Term is cheap, buy what you need to solve the financial problem of "does this asset (life insurance benefit amount) replace your personal working cash flow production that is needed to allow the family to live the lifestyle that you have decided on"?  As you build assets and pay down debt the need for the life insurance dissipates so having a laddered policy makes the most sense but sometimes is not much of a premium discount to justify the loss of time (going from 20 years to 10 years of coverage) so look at it both ways.  In addition by having two policies you are also having two internal policy fees which are not much but they are there....that is the reason having a $2 million dollar policy is cheaper than buying 2 $1 million dollar policies.

[Craigy]

Term is cheap, get as much as you want.  However, joking aside, you generally don't want to become more valuable in death than you are in life.  

Like Scott said above, with two policies you will pay two policy fees.  Not a big deal but it's typically cheaper to go with one policy.

I don't necessarily believe in the whole you-need-insurance-to-leave-your-family-set-in-luxury-for-life thing but if you can afford it, it's nice peace of mind.

[InsureIncome]

Be sure to choose an insurer/policy that allows conversion to permanent insurance (gasp, whole life and/or universal life) for the entire guaranteed term period; the conversion right is inexpensive but allows you to convert the policy at the end of the term period, even if you are medically uninsurable but still need/want coverage; you will be charged the attained age premium for permanent life insurance issued currently at the same underwriting class as a the original policy.

For example, you may become terminally ill and your term insurance may otherwise expire before you do. You may allege you don't "need" the life insurance proceeds but paying one or two additional permanent life premiums in anticipation of predictably certain premature death, may be worth it if the life insurance benefit pays sooner rather than never.

 

[LBKCLU]

Keep in mind that you can potentially "ladder" your coverage within the same policy if you purchase your term insurance from Banner. You would just compare the cost of a $2,000,000 20-Year Level Term policy with a $2,000,000 10-Year Level Term Rider to the cost of separate policies from other companies to see which works out to be more favorable in terms of cost.

Laddering within one policy from Banner will save you the $60 policy fee normally associated with each additional policy that would be purchased.

[Cardonfire]

I have 2m for 20 years term and 1m for my husband since I made more. Start having it when I was 35 years old and had 1 kid. This is outside work which also provide another 500k.

[AlexxT]

If you wait to get your policy, you may develop an illness before then and become uninsurable.   By getting the insurance now, you're effectively  insuring against the possibility of becoming unisurable.

The argument against laddered policies is that inflation will be decreasing the value of the policy, so by the time 20 years goes by, that 2 million dollar policy will be worth less than 1 million.   I'm not taking a position on this, just food for thought.

Personally, i would go with a  4 million 30 year term, or maybe a 2 million 20 year policy plus a 2 million 30 year policy.

Here's why you need a 30 year policy:  Will you be financially independent and able to retire in 20 years?   Most people aren't.  You might be, but you haven't had those kids yet.  You may not have calculated  how much you might end up spending on them.   Since you can't be sure that you'll be financially independent by then, then you'll need a policy duration that's longer than 20 years.  20 years from now, you could have a 10 year old, or younger.   Maybe several children still in elementary school.

Remember, it's insurance.  You're insuring against bad things happening, things you don't expect.  So despite how sure you are that you'll save all that money, pay a little more now to protect those children.  Don't forget, if you do become financially independent sooner, you can drop the policy.   It's insurance, and your hope is that your premium money gets wasted, so don't be stingy.

Here's why you need 4 million :  If you have children in the next few years, and die, you will be leaving behind young children, and you will not have accumulated any substantial assets.  You will need that full 4 million to raise those kids and put them through college and graduate school.  Two kids in college and med school today can cost you over 1 million dollars.  In 25 years, it could easily be double that or more.  That's 2 million dollars right there, and you haven't even paid for formula or diapers.  If you  have 4 kids, double that figure.

Also, be sure to insure your spouse, even if she's a stay at  home parent.  If the other parent dies, you may want to work no more than half time in order to be there for your kids. ( or not at all if they are very young).  You will need extra money to pay for nannies so you can be on call at night.