Do I need more life insurance?

[JK]

I’m in my final year of residency and will be joining a private practice specialty group with anticipated first year earnings of 300-400k. As I am wrapping up training, I am doing a review of some of my financials. This week...life insurance.

-30yo M. No medical problems.

-Married. Wife is stay at home currently with 1yo child. She is a mid level who will likely return to work part time in the next few years.

-Anticipate one more child in the next 1-2years.

-No student loans. Have about 400k in net worth including investments, 529, cash, etc.

-currently rent. No mortgage.

-Current life insurance: one million x 20 years + one million x 30 years for about 1k. Separate 1 million x 20years for my wife.

-anticipated yearly spending 80-100k as an attending but you never know until you start. We’re pretty frugal though.

I’m debating about adding another 10 year, one million or keeping things the same. Curious what the group thinks.

 

 

[Donnie]

Yes, I would get more like $3.5M ($2.5M for retirement, $1M pre-retirement (assuming your wife can make about $75k if she goes back to work), $400k for kids' college tuition, less $400k of current net worth).  Get started by canceling your wife's policy.  She doesn't generate current income that is necessary for the family, so no need to insure her.

[Hank]

I completely disagree with Donnie on this point. While your wife currently doesn’t work outside the home, you would be well and truly up a creek if she passed away. First, you would be distraught. Life insurance would do little or nothing to alleviate this. Second, you would need to have someone take care of your child, take care of you, and take care of whatever household functions your wife currently performs.

Need to let a plumber in to fix a leaky toilet? You need to cancel surgery so you can be there. Need to go to the grocery store to get provisions? That’s on you. You can’t send a sick kid to daycare, so if your kid gets the sniffles, that means you can’t take call.

A million dollars in insurance proceeds won’t mend a broken heart and won’t (legally) take care of the companionship that one’s spouse provided, but it’ll go a long way towards taking care of your offspring and allowing you to do the work necessary to keep a roof over your head.

You may or may not need another million or two in life Insurance coverage beyond the $2M you currently have. However, it would be the height of foolishness to drop coverage on your work at home spouse prior to financial independence.

[FIREshrink]

I think you have the right amount.

[ENT Doc]

Completely agree with Hank here.  She does valuable things as a stay at home mom that you can quantify assuming her absence - daycare, for example.  Then there are the less well quantifiable such as going shopping or being there so someone can have something fixed.  Absent her, you are either spending more eating out or taking more time to do it, both of which involve spending more.  Whether $1M is appropriate I don't know.

Additionally, she plans on going back to work.  As a mid-level she can make a good income to supplement most of your living expenses in your absence.  Your life insurance should cover that which she can't with her income.  You'd have to calculate what living expenses she might not be able to cover, plus random events like buying a car or paying for college.  You'd have to factor your 529 into that too.  Also add in retirement.  You assume the life insurance will be invested upon your death.  So lots of math here.  My guess is that you're probably ok.  The most important thing you can do to put your mind at ease in regards to this is forget about your new income.  Live frugally and save.  In a few short years you'll be wondering if you have too much life insurance.

Nice work BTW with your current financial position.

[Dont_know_mind]

I would get the extra 1M insurance for 10 years if you can get a reasonable price and before you get any medical problems.
I would tend to overinsure in terms of death/disability for the first 10 years, particularly if you have young children, then underinsured when you are FI.
Then if you get a mortgage or leverage it is less of a worry.
I am thinking of ditching my home and comprehensive car insurance this year and self-insuring. But my wife tells me I should keep it because I'm a bad driver and because we live in an old house.
In the next 2-5 years I am thinking of ditching the income protection and life insurance. I'm 43 and think I probably have reached a stage where I have enough assets to self insure.
I think in terms of value of the insurances I have- life/disability is the best value for what I have to pay compared to its function, medicolegal next and then house followed by car. I am not sure if it's because I haven't shopped around but my comprehensive car insurance just seems bad value for what I get, even on a newish (less than 2 year old) car.

[Donnie]

Hank wrote:

I completely disagree with Donnie on this point. While your wife currently doesn’t work outside the home, you would be well and truly up a creek if she passed away. First, you would be distraught. Life insurance would do little or nothing to alleviate this. Second, you would need to have someone take care of your child, take care of you, and take care of whatever household functions your wife currently performs.

Need to let a plumber in to fix a leaky toilet? You need to cancel surgery so you can be there. Need to go to the grocery store to get provisions? That’s on you. You can’t send a sick kid to daycare, so if your kid gets the sniffles, that means you can’t take call.

A million dollars in insurance proceeds won’t mend a broken heart and won’t (legally) take care of the companionship that one’s spouse provided, but it’ll go a long way towards taking care of your offspring and allowing you to do the work necessary to keep a roof over your head.

You may or may not need another million or two in life Insurance coverage beyond the $2M you currently have. However, it would be the height of foolishness to drop coverage on your work at home spouse prior to financial independence.

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I don't think the point of insurance is to cover things like this.  Yes, his costs will go up if his wife dies.  No, it won't be severely damaging to his financial situation if he has to pay $15-25k more per year in childcare and other costs.  For a person making $350k, insuring against expenses totalling 4-7% of his income is not the type of cataclysmic event that you need insurance for in my opinion.

Let's put this in perspective, the insurance situation is $2M for the husband making $350k per year and $1M for the stay at home wife.  Do you think the family will be only twice as negatively impacted financially (i) if the husband dies and the family permanently loses his high income compared to (ii) if the wife dies and the family loses "free" childcare and home care?

One thing I notice on this board is the use of inapplicable hyperbolic statements.  Not having a $1M policy on your non-working spouse as a family with a $400k net worth and a $350k annual income is not the "height of foolishness."  You may think it is foolish (and that's fine), but that is just a personal preference.  I prefer to self-insure when possible, and at $350k per year, I could easily cover an increase in childcare expenses.

 

[FIREshrink]

Who says he'll keep making $350,000 after his wife dies? In my experience that almost never happens, not right away. Usually income goes down at the same time expenses go up. I think you are underestimating the potential impact.

[Donnie]

FIREshrink wrote:

Who says he’ll keep making $350,000 after his wife dies? In my experience that almost never happens, not right away. Usually income goes down at the same time expenses go up. I think you are underestimating the potential impact.

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I don't get what you mean.  At $350k, he has ample room for his income to decline both temporarily or permanently if he is spending $80-100k currently.  He's not going to need to go into debt to support his family because his income drops to $250k and he is now spending $120k per year.  In my opinion, the intent of insurance is not to allow you to retire early or to maintain a super high savings rate if your spouse dies.

Either way, keeping or stopping insurance on the spouse is not going to make or break this family's financial well-being, so there isn't much need to debate the topic further.  Insurance is cheap, so insure your no-income spouse for $1M if you want.  I would definitely add to the husband's insurance as under-insuring the high income professional will have a much more negative impact on the family than any decisions about insurance on the no-income spouse.

[FIREshrink]

We’ll have to agree to disagree on the potential impact of a spouse’s death on the survivor. I’ll stand by my assertion. Anyway, as you point out, it’s very cheap insurance. Better to have too much than too little for such a nominal premium.

[FIREshrink]

Didn't say he wouldn't work. Suggested he not minimize the chances of making significantly less.

[AlexxT]

I vote for more.  I would get another 1 million for 20 years, and keep the insurance on your wife, or even add another million for 20 years for her, for the reasons mentioned above.  She will go back to work, and you might come to depend on that income. You can always drop some of it later as your assets increase.   I have similar amounts.  It's cheap, and helps me sleep at night.

One reason I have more insurance than I need is that I'm not sure that my wife will manage the money the way I want it done. She doesn't seem to pay much attention to our investments as I would like, although she is very frugal.  So one function of the insurance money is to provide an extra cushion to make up for some bad financial decisions that might get made. But that's just me.

[Zaphod]

Hank wrote:

I completely disagree with Donnie on this point. While your wife currently doesn’t work outside the home, you would be well and truly up a creek if she passed away. First, you would be distraught. Life insurance would do little or nothing to alleviate this. Second, you would need to have someone take care of your child, take care of you, and take care of whatever household functions your wife currently performs.

Need to let a plumber in to fix a leaky toilet? You need to cancel surgery so you can be there. Need to go to the grocery store to get provisions? That’s on you. You can’t send a sick kid to daycare, so if your kid gets the sniffles, that means you can’t take call.

A million dollars in insurance proceeds won’t mend a broken heart and won’t (legally) take care of the companionship that one’s spouse provided, but it’ll go a long way towards taking care of your offspring and allowing you to do the work necessary to keep a roof over your head.

You may or may not need another million or two in life Insurance coverage beyond the $2M you currently have. However, it would be the height of foolishness to drop coverage on your work at home spouse prior to financial independence.

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I have a small, 1-2M I think 10 year policy on my wife for just these reasons. I think mine is 3M but for 20 or 30. Not only would you have trouble working, but the value of your wife even if staying at home is very quantifiable and pretty large as it allows you to make your money with a lot less hassle. Dont overlook it.

I dont think  the insurance is absolutely necessary. However, it is very very cheap and would make a difficult time ever so slightly easier to cope with which is worth the tiny cost. The suggestions are likely due to this very asymmetric cost/benefit setup.

[Jason Veirs]

As others have mentioned, due to your age and health, a new $1MM policy would be rather inexpensive, so you may consider layering on an additional policy, especially based on a $300-400k annual income. As always, I think it really helps to know the potential cost, so here are the figures based on a 30yo Male at the best Preferred Plus NT health class.

Male - 30yo, Preferred Plus Non-Tobacco:

10yr Term: $235 annually or $20.33 per month

15yr Term: $275 annually or $23.65 per month

20yr Term: $390 annually or $34.13 per month

Lastly, I also would echo what others have said about not dropping the coverage on your wife. I'd assume she's around the same age as you, in which, you're probably paying around $28 per month for her coverage. To me, that's small price to pay for a little for peace-of-mind - Especially if she plans on going back to work in the next few years. Just my two cents.