How much term life insurance should I buy?

[jfoxcpacfp]

Noob to WCI wrote:

Wanted to bump a new question into this thread.

Anyone ever go up to a $5mil term life policy? Finishing up fellowship and looking at a 20 year term for 2400/yr ($200/mo). A $3mil policy is 1600/yr. Luckily, I’m healthy at the moment and can get a good rate.

I’m 34 yo w/ 2 young kids, unsure if we are going to have more at the moment.

Expected income to be around $500k as partner in 2 years.

My wife is a physician as well.  She is in academics and makes around 200k. She could go PP and make a lot more but I wouldn’t want to force that on her should I die early. Plus she would need childcare expenses, ect.

Current debts: 200k student loans and 600k home loan.

I plan on being financially independent in less than 20 years and can just drop the policy.

Is it crazy to carry a policy this high? I’ve seen the posts where some dual income physicians choose to carry 0 term insurance because the other can make up the income difference. With a price difference of only $70/mo between a $5mil and $3mil policy, is it better to be on the safe side?

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It really depends upon the specifics of your personal situation, goals, and plans. Maybe your parents are depending upon you, maybe you want to fund college for 3 kids, maybe you’re just drawing a number out of the hat and it seems cheap. It may be cheap relative to whole life, but the cost and probabilities are priced into these products - never forget that. There is no way to know what you’ll need relative to your current plans w/o a lot more info.

We have clients with that much life ins and clients with much less. There are different reasons and scenarios for different people and situations, no cookie cutters or ROT when you are in this range. But DON’T think that the more you get, the better deal you get. It just doesn’t work that way. The agent has to make a profit and is betting to get the better of the deal.

[Hank]

Leave enough to take care of your loved ones, but don't be worth more dead than alive.

[portlandia]

5 Million?! I wouldn't want to tempt DW that much.  

[CordMcNally]

That seems excessive to me. Child care may be expensive but not $5M expensive. I think a $1-$2M policy would be more than plenty.

[Noob to WCI]

Wanted to bump a new question into this thread.

Anyone ever go up to a $5mil term life policy? Finishing up fellowship and looking at a 20 year term for 2400/yr ($200/mo). A $3mil policy is 1600/yr. Luckily, I'm healthy at the moment and can get a good rate.

I'm 34 yo w/ 2 young kids, unsure if we are going to have more at the moment.

Expected income to be around $500k as partner in 2 years.

My wife is a physician as well.  She is in academics and makes around 200k. She could go PP and make a lot more but I wouldn't want to force that on her should I die early. Plus she would need childcare expenses, ect.

Current debts: 200k student loans and 600k home loan.

I plan on being financially independent in less than 20 years and can just drop the policy.

Is it crazy to carry a policy this high? I've seen the posts where some dual income physicians choose to carry 0 term insurance because the other can make up the income difference. With a price difference of only $70/mo between a $5mil and $3mil policy, is it better to be on the safe side?

[wcireader]

Thank you, jfoxcpacfp and Scott @ MD Financial Services , for your helpful replies.

[Scott at MD Financial Services]

Most carriers allow you to decrease after year 1-3, depends on the company. There is no new rate schedule it is the rate structure that was in place. An example is if you have a $3 million 30 year contract costing $150 per month and you reduced it to $2 million the the cost would drop to $100.

[jfoxcpacfp]

wcireader wrote:

jfoxcpacfp wrote:

wcireader wrote:

jfoxcpacfp wrote:

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.

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Thank you again for your thoughts!

Just out of curiosity, you mentioned that $1M at most for my wife at this point, as she’s 5 years younger, not the main breadwinner, and no kids at this point.

How would you recommendations change if, say, we had 2 kids at home?

Just wondering about your thought process…

Thank you!

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$2M – $3M

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Again, trying to understand further. Where does the $2M – $3M number with 2 kids at home vs $1M with no kids at home yet come from? Is this a rough estimate of the cost of childcare over 10+ years? Just a “gut feeling”? Etc?

Thank you again!

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As with any life insurance recommendation, this is merely my estimate, although I do like AlexxT 's thought process. My goal for clients with children and a SAHP is that, should the SAHP pass, the surviving parent can stay at home from work for a minimum of a year to not only grieve, but especially to not disrupt the children's lives with a change from being at home with a parent to being in daycare or with an unfamiliar nanny. If the surviving spouse wishes, we'll aim for him/her to take a break of several years, until the child(ren) are ready to start school.

Financial planning is half art, half science. No matter how precise we attempt to be, we must accept that precision is not possible over either the long - or short - term. We are attempting to account for a variety of events that can thwart clients' goals while finding solutions to reduce the chances of not meeting those goals.

[wcireader]

AlexxT wrote:

wcireader wrote:

Where does the $2M – $3M number with 2 kids at home vs $1M with no kids at home yet come from? 

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If invested, 2-3 million will yield 100k to 120k a year.   That money would be needed to pay for childcare and / or a nanny, in addition to replacing your diminished income, since you would probably be cutting back on work in order to spend more time with the kids.  Remember, your spouse won’t be there to attend sporting events, school plays, parent-teacher conferences, etc.

With no kids, you might get away with no insurance, but the 1 million is there to let you have a buffer so that you could cut back at work while you recover from your loss.  It’s also there so that your spouse has insurance in the event that you have kids later,  but your spouse has become uninsurable in the interim.  If you expect to have kids later I would get the full 2 or 3 million now.  You can always drop it or decrease it if you decide not to have kids.

The laddering approach mentioned above is reasonable, but consider the fact that while your assets will be increasing with time, inflation will be eating away at the value of the policy.  In 20 years, costs will have risen by 50 to 60%.  In 30 years, they will probably have doubled, so that policy will already be worth only half of what it is today.  So a policy for the full amount will already be cut in half in 20-30 years due to inflation.  So I would be reluctant to ladder if you can afford the full policy.

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I see. Thank you so much for your thoughts and for presenting the counter-argument to laddering.

One clarification question re the bolded text above. Can you, in fact, decrease a term life policy while it is in force? If so, how does that work - what rate do they use for the new policy? Just wanted to clarify as whether or not that is possible would make a pretty big difference re what amount to get now.

Thank you again!

[AlexxT]

wcireader wrote:

Where does the $2M – $3M number with 2 kids at home vs $1M with no kids at home yet come from?

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If invested, 2-3 million will yield 100k to 120k a year.   That money would be needed to pay for childcare and / or a nanny, in addition to replacing your diminished income, since you would probably be cutting back on work in order to spend more time with the kids.  Remember, your spouse won't be there to attend sporting events, school plays, parent-teacher conferences, etc.

With no kids, you might get away with no insurance, but the 1 million is there to let you have a buffer so that you could cut back at work while you recover from your loss.  It's also there so that your spouse has insurance in the event that you have kids later,  but your spouse has become uninsurable in the interim.  If you expect to have kids later I would get the full 2 or 3 million now.  You can always drop it or decrease it if you decide not to have kids.

The laddering approach mentioned above is reasonable, but consider the fact that while your assets will be increasing with time, inflation will be eating away at the value of the policy.  In 20 years, costs will have risen by 50 to 60%.  In 30 years, they will probably have doubled, so that policy will already be worth only half of what it is today.  So a policy for the full amount will already be cut in half in 20-30 years due to inflation.  So I would be reluctant to ladder if you can afford the full policy.

[wcireader]

jfoxcpacfp wrote:

wcireader wrote:

jfoxcpacfp wrote:

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.

Click to expand…

Thank you again for your thoughts!

Just out of curiosity, you mentioned that $1M at most for my wife at this point, as she’s 5 years younger, not the main breadwinner, and no kids at this point.

How would you recommendations change if, say, we had 2 kids at home?

Just wondering about your thought process…

Thank you!

Click to expand…

$2M – $3M

Click to expand...

Again, trying to understand further. Where does the $2M - $3M number with 2 kids at home vs $1M with no kids at home yet come from? Is this a rough estimate of the cost of childcare over 10+ years? Just a "gut feeling"? Etc?

Thank you again!

[wcireader]

jfoxcpacfp wrote:

wcireader wrote:

jfoxcpacfp wrote:

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.

Click to expand…

Thank you again for your thoughts!

Just out of curiosity, you mentioned that $1M at most for my wife at this point, as she’s 5 years younger, not the main breadwinner, and no kids at this point.

How would you recommendations change if, say, we had 2 kids at home?

Just wondering about your thought process…

Thank you!

Click to expand…

$2M – $3M

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Interesting. Thank you so much!

[jfoxcpacfp]

wcireader wrote:

jfoxcpacfp wrote:

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.

Click to expand…

Thank you again for your thoughts!

Just out of curiosity, you mentioned that $1M at most for my wife at this point, as she’s 5 years younger, not the main breadwinner, and no kids at this point.

How would you recommendations change if, say, we had 2 kids at home?

Just wondering about your thought process…

Thank you!

Click to expand...

$2M - $3M

[wcireader]

jfoxcpacfp wrote:

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.

Click to expand...

Thank you again for your thoughts!

Just out of curiosity, you mentioned that $1M at most for my wife at this point, as she's 5 years younger, not the main breadwinner, and no kids at this point.

How would you recommendations change if, say, we had 2 kids at home?

Just wondering about your thought process...

Thank you!

[q-school]

Jason Veirs wrote:

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!

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are there any tax implications if you take the money yourself?  I always wondered how they would know how accurate prognosis is, and what happens if you outlive the prognosis.  so if you have 12 month prognosis and get a payout, but miraculously two years later are still alive, what happens?

thanks!