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How much term life insurance should I buy?

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  • How much term life insurance should I buy?

    I appreciate everyone's past advice re disability insurance. I also appreciate these two helpful articles:

    https://www.whitecoatinvestor.com/how-to-buy-life-insurance/

    https://www.whitecoatinvestor.com/term-life-insurance-strategies-for-physicians/

    I am finally finishing residency and starting practice (academics) in August.

    I would like to buy term life insurance for me +/- my wife, but am a little lost re how much.

    My age: 36

    Wife's age: 30 (almost 31)

    My annual pre-tax income starting next year: $275k (no state income tax)

    Wife's income: this is complicated, she is actually abroad currently and in the process of coming back to US as permanent resident; she makes $12-15k annually now which is a lot for her country, will likely be unemployed for a while when she comes here looking for work (or maybe not, as she is a go-getter and has a good CV - she completed her PhD here and has connections also, although she left academics post PhD)

    No kids yet, none on the way (until we get wife back in US and likely buy a house at some point)

    Current savings/EF: ~$30-35k

    No loans (MD/PhD)

    My Roth IRA: ~$26k

    Wife's Roth IRA: ~$6k

    No other retirement assets yet (but planning on maxing out 403b/457/backdoor Roth once I start attending life)

    I live in a condo, I am technically an owner but parents pay mortgage so I feel that it is really theirs. I don't pay rent.

    Ideally, I'd like to get enough to cover wife + 2 kids if I die. Wife planning to work although not sure what she will do after we have kids (maybe stay at home for few years).

    How much term life (I am assuming 30 year term) for me?

    How much for her (I am assuming 30 year term) once she is in US?

    Thank you!

  • #2
    It would take a bit more digging to make a suggestion but so you know term is pretty cheap so if you end up buying a bit to much it really is not a big financial hit.  For you, assuming you are in great health, the cost per $1,000,000 of coverage is:

    10 year rate lock $20 per month

    15 year rate lock $24 per month

    20 year rate lock $34 per month

    30 year rate lock $58 per month

    Hope that helps.
    Scott Nelson-Archer, CLU, ChFC
    303-953-0263 Direct / [email protected]

    Comment


    • #3
      Term Life Insurance is relatively cheap, as exemplified by those rates quoted by Scott, so err on the side of more, rather than less, life insurance.

      Remember that you don't necessarily need a 30 year term if you're planning on becoming financially independent in less than that time.  For example, if your family is on track to become financially independent in 10 or 15 years, a 15 year term would be fine.

      Generally, I would recommend enough life insurance that your wife and kids will not need to worry about money if you pass.  A million dollars supports approximately $30,000 per year in spending power (I prefer the 3% rule over the 4% rule).  Therefore, if your wife and kids will need $90,000 per year, that would be $3 million in coverage.  You can adjust up or down from there.

      As far as life insurance on your wife, there are several ways to look at this.  If you don't want to have to worry about money if she passes, I would recommend the same amount as for you ($3 million in the example above).  If you feel you would be able to continue working, and your relatively high salary would have no trouble paying the bills (including childcare bills), then you could potentially go without.  However, I would imagine that the passing of a spouse would be extremely traumatic and may hamper your working ability, so in general, I would recommend the former option.

      I hope that helps!

      Comment


      • #4
        Not sure I'd factor in kids since you don't have them yet.  But when you do, make sure to account for those good times college costs for years 18-22 (x2) in addition to the annual living expenses.  College makes the need a good bit higher, especially when factoring in the standard 4% per year growth.

        Comment


        • #5
          It's pretty cheap to grab at least 1M.  Too much and you start to have some murder risk

          I have heard multiple financial advisors say you need 20x your annual income, which seems pretty ridiculous, particularly since you may not actually live on that much per year, which ends up being a ************************ of a lot for a doctor, and especially since you won't be around to spend it.

          Comment


          • #6
            LOL Craigy.  Just so you know if one murders someone then the death benefit can't be paid out to them (no distribution for financial gain), it would be passed along to the next beneficiary if documented or would go to your estate/will.

            Personally what I use is for every $1 million of cash you can get about $2500 per month distribution without hitting the principal.  Now you just have to figure out how much you want for spousal spending upon your demise.  As an example if you want $100,000 per year then you need $3.33 million of assets (not including your home, you have to live somewhere).  If you have $2 million saved (as an example) then by adding $1.33 million in term to create the asset you have yet to earn and save then that is what you should do.  The next step is to calculate how long it is going to take you to save that extra money so you can decide on the duration of term life coverage you might need/want.
            Scott Nelson-Archer, CLU, ChFC
            303-953-0263 Direct / [email protected]

            Comment


            • #7
              I wouldn't recommend 30-year term unless you really don't think you'll be able to live independently of the insurance net until then. Typically recommend 20-year term, $2M or $3M for you, $1M at most for your wife at this point - she's 5 years younger, not the main breadwinner, and no kids at this point.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                There are several ways to think about the way you should approach term insurance depending on your future goals and needs. You could look to replace expenses. You could replace your future expenses, college, retirement, etc. You could pick an arbitrary amount and go with that. Some people choose 10 times income.

                I wrote an article about how to approach term life insurance that might help. There is a chart towards the end with three different approaches.

                http://www.highincomeparents.com/how-to-approach-term-life-insurance/

                Comment


                • #9
                  I like the laddered approach that some have suggested in these forums. If I were buying term life today, I'd do something like this:

                  • $1 Million 10 year term

                  • $1 Million 20 year term


                  That way, if I kick the bucket in the first 10 years, the benefit is $2 Million. After that first 10 years, I would hope to have $1 Million in investments, and the benefit can drop to $1 Million.

                  If you're planning a more traditional savings path of 15% to 20% savings, you might want to add an additional 30 year $1 Million term so the benefit will be $3M, $2M, then $1M.

                  Best,

                  -PoF

                   

                   

                   

                  Comment


                  • #10
                    Thank you, all, so much for your thoughts!!! I appreciate all of the very very helpful input.

                     

                    I would love to reply to each & individual post, but I'm still processing all of the super helpful information.

                     

                    Thank you again!!!   

                    Comment


                    • #11
                      Maybe a dumb question.

                      Wife and I both have stacked 30 year and 15 year term life policies we obtained several years ago at great rates we could not get again now.

                      We've saved better than expected and would ideally like to decrease the length of the policies to stacked 20/10 or 15/10 year policies, while maintaining the same amount of coverage.

                      Will most insurance companies let you decrease the length of coverage (i.e. 30 yr to 20 yr) and decrease your premium using the same age/rate tables as the original policy?

                      Comment


                      • #12
                        Not a dumb question, we get that one often.
                        The vast majority of carriers will not allow you to decrease you duration lock. Unless you have health issues which preclude you from underwriting a new policy there are some solutions to accomplish what you want and save you some money in the process. If you want to email me I will run the numbers for you and make some recommendations.
                        Scott Nelson-Archer, CLU, ChFC
                        303-953-0263 Direct / [email protected]

                        Comment


                        • #13




                          I like the laddered approach that some have suggested in these forums. If I were buying term life today, I’d do something like this:

                          • $1 Million 10 year term

                          • $1 Million 20 year term


                          That way, if I kick the bucket in the first 10 years, the benefit is $2 Million. After that first 10 years, I would hope to have $1 Million in investments, and the benefit can drop to $1 Million.

                          If you’re planning a more traditional savings path of 15% to 20% savings, you might want to add an additional 30 year $1 Million term so the benefit will be $3M, $2M, then $1M.

                          Best,

                          -PoF

                           

                           

                           
                          Click to expand...


                          This is brilliant.

                          Comment


                          • #14
                            Thank you, all, again, for your replies. I had a few more questions.

                            1) Nitpicky question - I know that term life insurance probably doesn't "happen" right away. For example, I would apply, then probably I would need to do some kind of exam and lab tests, etc. etc. and then finally they'd say "congrats! you're approved" and ask me to pay. Ideally, I'd like to get this done at some point near my attending start date (I could just prepay the first year from our savings/emergency fund, for example). How long before I want to actually send in my payment should I start the process? 1 week? 2 weeks? 4 weeks? 6 weeks? 8 weeks? ...

                            2) So I am trying to figure out pricing. In order to get my bearings, I compared two policies - 30 years (it was WCI's default in his articles) $3m and 30 years $4m.

                            Using term4sale, for $3m I get Cincinnati Life Insurance Company LifeHorizons Termsetter 30 $2,445.0/yr as cheapest.

                            For $4m, I get the same product from the same company $3,235.00/yr as cheapest.

                            That means I pay $790/yr extra for $1 million extra in life insurance.

                            Now, I made as simple spreadsheet (attached) that calculates how much I will have if I simply invest $790/yr at a return of 8% (probably an overly optimistic estimate of stock market returns per https://www.bogleheads.org/wiki/Historical_and_expected_returns#Expected_future_re turns ).

                            In 30 years of investing $790 yearly, I will only have an extra ~$90,000, which is << the $1 million in coverage extra that I would have by buying $4m policy.

                            Now, I realize that I likely won't die and thus won't get any of the money. However, it seems that it would be much easier to just buy the extra million, e.g., as I would not be able to "self-insure" for that million even if I invested the extra money during the whole 30 years.

                            What am I missing???

                            I realize that there are a lot of calculations I could make to potentially pick a smaller number or do a lesser term or a tiered approach.

                            However, I feel that there are just so many variables (no kids yet, no house yet, right now obviously I'm not paying much in expenses, etc.) that it makes sense to go a little higher rather than lower. And, honestly, I'd rather just do a good job buying the life insurance and then "forget it" if I can for the next 30 years. As much as it is fun to learn about it, I'd rather focus on seeing patients, raising a family, maybe investing, etc. For example, I do NOT want to buy extra term life insurance, when I have kids, as I'd rather get it out of the way now, if possible... (while I have time and am healthy)

                            Am I missing anything?

                            Thank you so much!!!  

                             

                            Comment


                            • #15
                              1:  6-8 weeks is ideal time for underwriting, it sometimes happens quicker but that depends on how quickly you get your requirements done but it can also take longer if there are medical records which prove to be more difficult to obtain.

                              2:  Actually if you are in Super great health then $3m for 30 years could be $2,371 and $4m for 30 years is $3,137.

                              Some of what you are asking is about 'wants' and not 'needs' so most reps can help with the 'needs' but the 'want' only you can really quantify.  My suggestion is to go through underwriting and once underwriting is completed you can then decide how much you exactly want once you know the exact cost per dollar of coverage.  Remember these premium rates you see from any site or rep are proposals and not actual offers until the carrier finishes your medical evaluation.
                              Scott Nelson-Archer, CLU, ChFC
                              303-953-0263 Direct / [email protected]

                              Comment

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