Including Social Security while Determining Life Insurance Need

[Western wolf]

I am a new EM attending and I am taking WCI's advice to heart and getting ready to purchase term life insurance.  First step is calculating how much coverage I need.  Based on WCI's recommendation I would like to have a policy worth 2 million.

Based on the social security website my wife should be eligible to receive a substantial amount of money over the next 20 years if I die.  It looks like the monthly payment would amount to be about 40K annually.  On the term4sale website there is a "how much insurance do you need" calculator that estimates that a 600,000 life insurance policy would be worth about 40,000 for 20 years assuming that inflation was 3% and growth was 6%.

I understand that the value of the social security goes down every year because each year that I don't use it is one less year of potentially receiving payments but at the same time I anticipate that my portfolio should grow enough to keep up with the decreasing value of the social security benefit.

Based on that information I'm thinking about getting a life insurance policy worth 1.4 million (2M - 600K).  Does this seem reasonable?  Does anyone see a glaring error in my judgement?  I would appreciate advice.  Thanks!

 

[jz]

You haven't considered your wife's behavior.   If your wife is attractive, she is likely to remarry within 5 years of your death. How much do you want to support her new marriage?   Do you have children?   Focus more on disability insurance.

[jfoxcpacfp]

You need more life insurance in the early years, less as you get closer to financial independence. Your goal should be to be self-insured by the time your term lapses. I like WCI's term life ladder strategy (substitute your own numbers). Social Security will come into play after you are no longer insured under this scenario. Of course, this assumes that you have an average lifespan and claim SS at FRA or later. If you die early and your surviving spouse claims, the extra income will allow (her?) to pay off all debt, stay at home with the kids, and invest the rest.

[VagabondMD]

jz wrote:

You haven’t considered your wife’s behavior.   If your wife is attractive, she is likely to remarry within 5 years of your death. How much do you want to support her new marriage?   Do you have children?   Focus more on disability insurance.

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That's pretty cynical, and life insurance is cheap.

In my mid-30's to mid-40's, I was carrying about $2.5M. I am now 50 and down to $1.5M. Unfortunately, it is one policy. I could probably cut it in half, but I have not bothered to take the time to think about it or do it.

[jfoxcpacfp]

Vagabond MD wrote:

jz wrote:

You haven’t considered your wife’s behavior.   If your wife is attractive, she is likely to remarry within 5 years of your death. How much do you want to support her new marriage?   Do you have children?   Focus more on disability insurance.

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That’s pretty cynical, and life insurance is cheap.

In my mid-30’s to mid-40’s, I was carrying about $2.5M. I am now 50 and down to $1.5M. Unfortunately, it is one policy. I could probably cut it in half, but I have not bothered to take the time to think about it or do it.

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jz's comment was a bit crass, but it is a practical consideration. I often joke with clients about it - they've rarely looked at it that way. It's typically worse if the wife dies first. Men are more likely to remarry and support their new wife's kids (or the ones they have together), risking the inheritance of the 1st set of kids. Women tend to be more pragmatic. At least, that has been my experience.

[The White Coat Investor]

Sure, take it into account. But I typically recommend figure out how much life insurance you need and round up to the next million. Term is so inexpensive, might as well buy a little extra.

[jfoxcpacfp]

The White Coat Investor wrote:

Sure, take it into account. But I typically recommend figure out how much life insurance you need and round up to the next million. Term is so inexpensive, might as well buy a little extra.

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Agreed. It is a consideration, not a determinant. Once, a husband turned to me and said, "H*ll, after living with me all these years, she deserves whatever money can buy."

[Zaphod]

jfoxcpacfp wrote:

The White Coat Investor wrote:

Sure, take it into account. But I typically recommend figure out how much life insurance you need and round up to the next million. Term is so inexpensive, might as well buy a little extra.

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Agreed. It is a consideration, not a determinant. Once, a husband turned to me and said, “H*ll, after living with me all these years, she deserves whatever money can buy.”

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I couldnt care less about funding my wifes next better life (and the children). Good for them if it occurs, why wouldnt you want that?

[jfoxcpacfp]

Zaphod wrote:

I couldnt care less about funding my wifes next better life (and the children). Good for them if it occurs, why wouldnt you want that?

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Some folks do consider it, especially as they grow older and/or on a second marriage with kids from priors. Personally, I don't have an opinion. My job is to explain, clarify, implement, and monitor.

[AlexxT]

I would go with a 3 million dollar policy, and consider any Social Security benefits to be a small bonus.

I think the figures you cited from the calculator to be a bit optimistic.  Sure, you can get 6% a year, but if your only source of income is going to be the insurance money, you'll need to be more conservative with this money, which will mean lower yielding bonds. All of my money is in equities, because I have enough to spare, but if my only money was a 2 or 3 million dollar insurance payout, and that had to last a lifetime, including retirement, and support my children as well, I would recommend being more conservative with it. Right now 10 year treasuries are yielding less than 2%.   You also need to consider that this money might need to support retirement as well.  Your spouse will earn less while raising the children.  Inflation will take a big bite out of the value of the insurance over time.  It's true that you will also be accumulating assets over time, but you might die early without other substantial assets.  The insurance money will be worth half of what it is now in 20 years when your youngest children will be ready for college tuition.  That extra million in insurance will cost you about one latte` a day.  I would lean towards a 30 year 3 million dollar policy and not ladder due to inflation decreasing the value of the policy, but you could always split the difference and get a 2 million 20 year policy and a one million 30 year policy.

My will and trust will preserve my assets for my children, and protect them from the new spouse, but if my wife wants to take a trip to Tahiti with the pool boy, good for her.

[Western wolf]

Thanks so much everyone, very helpful thoughts and comments!