How much term life insurance should I buy?

[wcireader]

Scott, thanks so much for your helpful reply!

I guess my other question, based on your comments - what medical records do they need? Can these be obtained as part of the term life insurance process?

I haven't really had any significant medical problems, and other than some lab tests here and there or some past physical therapy for sports injuries, I'm not sure there'd be much to find in my records.

My PCP moved away a few years ago, and I haven't really established another one (I tried one time but it didn't work out b/c they were an hour behind and so the NP/PA just saw me b/c I had two quick things I needed for an international trip). I did do my lipids, etc., but I did it as part of an institutional program as they give you an Amazon GC for doing the "annual check." Not sure the results would count as "medical record" per se, although it was done at a LabCorp/Quest (forget which).

Thanks again!

[Scott at MD Financial Services]

First off your welcome.

As for medical records they might go after are a review of any primary medical care you have received, look at past labs / tests associated with those and then if there were any referrals to specialists they will go after those records as well.  At your age I would assume there won't be much so it won't take long, they are pretty good at getting things.  In addition, they will do what is called a script check to see what prescriptions have been filled under your name/ss#/or health insurance along with a driving record check and credit check to see if there are any bankruptcies in your past.

In the past when medical records were pretty much hand written there was not near as much information to comb through but with EMR's I was at a meeting last week where the underwriters were stating the average medical record is now in excess of 100 pages and some are 600-700 for people with on going issues or multiple surgeries.  There is nothing you need to do, the insurance company and occasionally the rep will help obtain those so the insurance company can do their own investigation.

Just make sure you are comfortable with who you work with.  As much as it seems to most that the term life business is not much more than a fast food business it can sometimes be tricky to get the best potential offer on the table.  As an example, some carriers have knock out questions like 'any family have heart, cancer, or other major organ issues prior to age 60", "has any immediate family member died prior to age 60", height weight ratios, and even avocations.  These sort of things can all lead to premium increases with some carriers and the typical quote engines simply won't pick that up.

[wcireader]

Scott, thank you again for your very helpful response!

As a physician, I am definitely well aware of the long medical notes (full of auto-populated lab values, imaging results, etc.) that are a characteristic of many modern EMRs, especially on the inpatient side.

Thanks again!

[Jason Veirs]

TheGipper wrote:

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?

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I'm not sure if you're aware and it may not be helpful, but most carriers will allow you to reduce the face amount of your policy at least once during the duration of the term period, in the event that do not require as much coverage. The carriers usually have a minimum of $100k or $250k, depending on the specific carrier.

You can also just stop paying on a term policy at anytime, though it sounds like it wouldn't help in what your trying to accomplish.

[Noah]

If there is a doubt about what health category you will be put in is it reasonable to apply for 2 different policies and then see if one gives you a more favorable rating/pricing and go with them?

[fasteddie911]

I recently went thru this for my spouse and I, similar age to you and no kids as well (with plans for them in the near future).  Instead of just choosing a rule-of-thumb number like some suggest, I actually ran the numbers to see what exactly WE would need.  I wanted set my wife and kids up for life so my wife wouldn't have to work and would be taken care of thru retirement.  We didn't get a policy for her, yet, as I could handle the financial issues if something happened to her, but it's certainly understandable if you got a policy for your wife.  I setup a spreadsheet which can be a bit tedious, but basically I looked at expenses (to raise a kid and carry wife thru retirement), savings rates, withdrawal rates and age (of wife and kids).  Also, not forgetting to consider inflation since the policy isn't inflation adjusted.  Of course there are a lot of unknowns and variables, but we tried to make an educated guess. For us, we're renting and have college savings setup already, so we ignored those expenses, but if/when we buy a home I'll likely re-evaluate the policy and potentially purchase more coverage to take care of housing costs.

I did strongly consider laddering policies, with the idea that as the nest egg grows with regular savings, less insurance will be needed, saving a few bucks by not having too much or too long an insurance policy.  However, this also required an estimate of savings rate and investment return vs. time, which can be tricky.  There is the risk of undersaving or dismal returns and becoming underinsured if a policy runs out, at which point you may have to reapply at a higher rate or not be approved at all.  There's 2 sides to this argument, of course, but I wasn't interested in getting that specific and detailed with my policy, and the potential cost savings of a few hundred dollars per year wasn't worth the hassle or risk, so I just went with one policy for one amount for one term.  Similarly, I was debating between doing a 20 vs 30 year term (25-year was ideal, but agent said price of 25 year vs 30 year wasn't much different), 20 year would likely be ok, but 30 year gave a little more peace of mind and cushion for a just a few hundred dollars more per year

[Rambo]

fasteddie911 wrote:

I recently went thru this for my spouse and I, similar age to you and no kids as well (with plans for them in the near future).  Instead of just choosing a rule-of-thumb number like some suggest, I actually ran the numbers to see what exactly WE would need.  I wanted set my wife and kids up for life so my wife wouldn’t have to work and would be taken care of thru retirement.  We didn’t get a policy for her, yet, as I could handle the financial issues if something happened to her, but it’s certainly understandable if you got a policy for your wife.  I setup a spreadsheet which can be a bit tedious, but basically I looked at expenses (to raise a kid and carry wife thru retirement), savings rates, withdrawal rates and age (of wife and kids).  Also, not forgetting to consider inflation since the policy isn’t inflation adjusted.  Of course there are a lot of unknowns and variables, but we tried to make an educated guess. For us, we’re renting and have college savings setup already, so we ignored those expenses, but if/when we buy a home I’ll likely re-evaluate the policy and potentially purchase more coverage to take care of housing costs.

I did strongly consider laddering policies, with the idea that as the nest egg grows with regular savings, less insurance will be needed, saving a few bucks by not having too much or too long an insurance policy.  However, this also required an estimate of savings rate and investment return vs. time, which can be tricky.  There is the risk of undersaving or dismal returns and becoming underinsured if a policy runs out, at which point you may have to reapply at a higher rate or not be approved at all.  There’s 2 sides to this argument, of course, but I wasn’t interested in getting that specific and detailed with my policy, and the potential cost savings of a few hundred dollars per year wasn’t worth the hassle or risk, so I just went with one policy for one amount for one term.  Similarly, I was debating between doing a 20 vs 30 year term (25-year was ideal, but agent said price of 25 year vs 30 year wasn’t much different), 20 year would likely be ok, but 30 year gave a little more peace of mind and cushion for a just a few hundred dollars more per year

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So how much did you get for a 30 year term?

[Jason Veirs]

Noah wrote:

If there is a doubt about what health category you will be put in is it reasonable to apply for 2 different policies and then see if one gives you a more favorable rating/pricing and go with them?

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Hi Noah - We only usually do this on very large policies (usually over $3-5k in annual premium), as it is pretty costly to the carrier and unnecessary if you're working with a broker who works with all of the carriers and is familiar with their specific underwriting criterion.

It's much better to pre-qualify upfront and rule out the basics, such as H&W, medications, family history, driving record, and upcoming travel, and then apply with the most competitive carrier that you can qualify for, and then re-evaluate, if necessary. If something comes back other than expected after underwriting has been completed, then we just immediately evaluate other carriers, as at that point we have all of the data (completed labs, etc.). We can also just use your same exam that you previously completed and you will only have to sign a new application for the new carrier - We'll even call an underwriter beforehand and run the case by them directly.

To be honest, the two issues that we routinely see in coming back with a worser health rating, are elevated liver function testing (ie: GGT, AST, ALT, Globulin, Albumin, etc.), and elevated HDL Cholesterol Ratios. In order to get the top Preferred Plus rating with most carriers, your HDL Cholesterol Ratio will need to be under 4.5, but in the event that your HDL Cholesterol Ratio were to come back above 4.5, but under 5.0, then there are a few carriers who will still allow you to qualify for the top Preferred Plus rate with them. This can mean that you will be locking-in the lower Preferred Plus rate, versus the Preferred rate, which can save you a TON of money over a 20-30 year term period.

[wcireader]

fasteddie911 wrote:

I recently went thru this for my spouse and I, similar age to you and no kids as well (with plans for them in the near future).  Instead of just choosing a rule-of-thumb number like some suggest, I actually ran the numbers to see what exactly WE would need.  I wanted set my wife and kids up for life so my wife wouldn’t have to work and would be taken care of thru retirement.  We didn’t get a policy for her, yet, as I could handle the financial issues if something happened to her, but it’s certainly understandable if you got a policy for your wife.  I setup a spreadsheet which can be a bit tedious, but basically I looked at expenses (to raise a kid and carry wife thru retirement), savings rates, withdrawal rates and age (of wife and kids).  Also, not forgetting to consider inflation since the policy isn’t inflation adjusted.  Of course there are a lot of unknowns and variables, but we tried to make an educated guess. For us, we’re renting and have college savings setup already, so we ignored those expenses, but if/when we buy a home I’ll likely re-evaluate the policy and potentially purchase more coverage to take care of housing costs.

I did strongly consider laddering policies, with the idea that as the nest egg grows with regular savings, less insurance will be needed, saving a few bucks by not having too much or too long an insurance policy.  However, this also required an estimate of savings rate and investment return vs. time, which can be tricky.  There is the risk of undersaving or dismal returns and becoming underinsured if a policy runs out, at which point you may have to reapply at a higher rate or not be approved at all.  There’s 2 sides to this argument, of course, but I wasn’t interested in getting that specific and detailed with my policy, and the potential cost savings of a few hundred dollars per year wasn’t worth the hassle or risk, so I just went with one policy for one amount for one term.  Similarly, I was debating between doing a 20 vs 30 year term (25-year was ideal, but agent said price of 25 year vs 30 year wasn’t much different), 20 year would likely be ok, but 30 year gave a little more peace of mind and cushion for a just a few hundred dollars more per year

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Thanks so much for sharing your experience.

Any thoughts (from you or someone else) about the online calculators that are available - e.g., http://www.lifehappens.org/insurance-overview/life-insurance/calculate-your-needs/ ? (Any better ones?)

I tried three different scenarios.

One with no kids, small mortgage to pay off, otherwise defaults (for total annual income that my family needs, I went with 60% of total annual income next year based on their recommendation to use 60-75% of your income; I used 30 years of need for that income). I also assumed that my spouse would work at a (conservative) $50k/year for 30 years since there are no kids and I already passed away. This came out to $2.6 million.

I then adjusted the scenarios for 2 kids, both age 1 (age 0 makes the calculator not work). I also assumed that we now owned a $500k house for which we put down 20% (I believe reasonable for areas where I want to look, although my county you can definitely buy MUCH cheaper housing, albeit farther away; also, to be fair, you can buy much more expensive, I'm sure). I also now assumed that my wife will earn $50k/year for only 15 years (once the kids are almost ready to be sent away to college). Now, if both kids attend private college (I did), that is $4m. On the other hand, if both kids attend public college, the need is $3.6m.

Do the above estimates seem like reasonable ones based on your experience?

Thanks again!

[Scott at MD Financial Services]

Everyone has their calculations but for me I use a simple formula that for every $1 million in assets it creates about $2500 per month to spend post tax on the distribution. The question, in my opinion, is how much cash flow do you want your family to have on a monthly basis then divide that by $2500, now you know how much in assets you need. Subtract your current assets (house not included, they will need a place to stay), from that total and now you know your gap thus how much insurance you need. Now this does not account for inflation but it also does not account for capital asset consumption. If you feel like your number is not exactly enough then buy a touch more, term is cheap to solve the problem. Let me know if we can help further.

[wcireader]

Scott @ MD Financial Services wrote:

Everyone has their calculations but for me I use a simple formula that for every $1 million in assets it creates about $2500 per month to spend post tax on the distribution. The question, in my opinion, is how much cash flow do you want your family to have on a monthly basis then divide that by $2500, now you know how much in assets you need. Subtract your current assets (house not included, they will need a place to stay), from that total and now you know your gap thus how much insurance you need. Now this does not account for inflation but it also does not account for capital asset consumption. If you feel like your number is not exactly enough then buy a touch more, term is cheap to solve the problem. Let me know if we can help further.

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Thanks so much for highlighting your approach!

[Dusn]

One of the things that doesn't seem to get factored into to "how much life insurance do I need?" calculations is what might happen to your savings during a prolonged illness (and with improving healthcare some of these terminal illnesses can take years before they finally do you in).  Suppose I get a terminal cancer... I'm personally not going to want to work and will want to spend as much of that time as possible with family.  So in fact, I would hope my wife wouldn't have to work during my last few months or years to live as well and maybe she'll need time to grieve and figure things out should I pass away.    And healthcare expenses might go up dramatically.  So I may have a good amount of savings now  but I don't want to have to worry about that savings while dealing with a terminal illness.

[jfoxcpacfp]

Dusn wrote:

One of the things that doesn’t seem to get factored into to “how much life insurance do I need?” calculations is what might happen to your savings during a prolonged illness (and with improving healthcare some of these terminal illnesses can take years before they finally do you in).  Suppose I get a terminal cancer… I’m personally not going to want to work and will want to spend as much of that time as possible with family.  So in fact, I would hope my wife wouldn’t have to work during my last few months or years to live as well and maybe she’ll need time to grieve and figure things out should I pass away.    And healthcare expenses might go up dramatically.  So I may have a good amount of savings now  but I don’t want to have to worry about that savings while dealing with a terminal illness.

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This is exactly why I believe non-working spouses should have plenty of term coverage, also.

[q-school]

Dusn wrote:

One of the things that doesn’t seem to get factored into to “how much life insurance do I need?” calculations is what might happen to your savings during a prolonged illness (and with improving healthcare some of these terminal illnesses can take years before they finally do you in).  Suppose I get a terminal cancer… I’m personally not going to want to work and will want to spend as much of that time as possible with family.  So in fact, I would hope my wife wouldn’t have to work during my last few months or years to live as well and maybe she’ll need time to grieve and figure things out should I pass away.    And healthcare expenses might go up dramatically.  So I may have a good amount of savings now  but I don’t want to have to worry about that savings while dealing with a terminal illness.

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is this disability insurance or life insurance?  I guess it depends on how terminal the cancer is, as you allude to.

agreed that illnesses can suck up a lot of resources, especially if other spouse wants to take time to be with you and get you treatments in remote parts of the country or world.

 

 

[Jason Veirs]

Dusn wrote:

One of the things that doesn’t seem to get factored into to “how much life insurance do I need?” calculations is what might happen to your savings during a prolonged illness (and with improving healthcare some of these terminal illnesses can take years before they finally do you in).  Suppose I get a terminal cancer… I’m personally not going to want to work and will want to spend as much of that time as possible with family.  So in fact, I would hope my wife wouldn’t have to work during my last few months or years to live as well and maybe she’ll need time to grieve and figure things out should I pass away.    And healthcare expenses might go up dramatically.  So I may have a good amount of savings now  but I don’t want to have to worry about that savings while dealing with a terminal illness.

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This is a very good point and something that everyone should consider. In fact, most Term policies already have an Accelerated Death Benefit/Terminal Illness Rider, which is a free provision that sits on the policy and allows you to access a portion of the death benefit, in the event that you become Terminally Ill and have a life expectancy diagnosis of 12 months or less. There are a few carriers who have a 24 month trigger, with most being a 12 month trigger, but some carriers have a more stringent 6 month trigger. Every carrier has different parameters with regard to the life expectancy trigger, in addition to the amount that you will be able to access or accelerate, but this is something that a broker should easily be able to answer for you.

In all honesty, out of the nearly 10k clients that we've had over the past 40 years, I've only seen the Terminal Illness Rider used about 5-10 times, but it's a great option to have, as there is no cost unless you were to actually exercise the option. The most recent example of a client using this Terminal Illness Rider was with American General. She was a 50yo woman who was diagnosed with pancreatic cancer and had a life expectancy diagnosis of 12 months. She was able to access $250k of her $500k death benefit (AG has a 12mth trigger and a $250k cap), which she was able to use for whatever she liked. She ended up using some of the funds for medical treatment, but sadly, she succumbed to her illness. The remaining $250k then passed as death benefit to her beneficiaries, when she unfortunately passed away a few months later. A very sad situation, but the funds really helped ease some of the family's concerns.

Lastly, there are also a couple of carriers today who now offer Term with Living Benefit policies, which allow you to access a portion of the death benefit in the event that you become Critically (ie: heart attack, cancer, stroke, etc.), Chronically (ie: are unable to perform 2 ADLs "Activities of Daily Living"), or Terminally Ill. Since you have a much higher chance of becoming Critically Ill, these policies have a much greater appeal to many consumers. In addition, these policies are typically about 5-10% more expensive than the lowest Term carrier, but sometimes these options are in the top 5 lowest carriers on the market - A good broker should be able to point these out to you.

Hope this helps!