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Should I buy term life insurance?
Old 04-03-2015, 12:16 PM   #1
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Should I buy term life insurance?

DW and I are mid-30s expecting our first kiddo later this year. We both have good careers currently and for now we both plan to keep working (we'll see if that changes when the baby gets here). We have $1.1M financial assets plus a $500k house with $250k left on the mortgage.

Should we each get a $1M term policy or is it unnecessary with our net worth?
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Old 04-03-2015, 12:23 PM   #2
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The thing to think through is if you got run over by a beer truck tomorrow, would there be enough between the assets and DW's earnings for your DW and kiddo to live as you would like, funds for college, etc. Then do the same if DW got run over by a beer truck.

That said, I suspect another $1 million would make either of you more comfortable under either of those scenarios. If so, and the cost of a long term policy isn't very much then it might be worth doing.

If you decide that you need insurance then another option might be to each by a $0.5 million 20 year term policy and a $0.5 million 10 year term policy. That would provide you with $1 million of coverage for the next 10 years and $0.5 million for the subsequent 10 years since your need for insurance will likely decline as your assets grow.
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Old 04-03-2015, 01:14 PM   #3
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I agree, a 20 year term seems like what you'd both need. I wouldn't go any longer and I wouldn't pay anything extra for a "guaranty renewal" option. I'm 50, my youngest is 18 and I'll be canceling my life insurance pretty soon.
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Old 04-03-2015, 01:47 PM   #4
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I'd probably buy an annually renewable term (ART) policy for a million on each of you. At the rate you are accumulating assets you will not need the policies for that many years. ART policies are similar to term except the premium goes up each year as you age and there is no set term. The advantage in a situation like yours is that the premium on ART usually starts out at a material discount to 20 year term. TIAA-CREF sells these and when I bought my 20 year term policy I also price the ART variety. Break-even was like 12 years (with no time value of money), which is about the point at which I cancelled the 20 year term. I would have been better off with the ART policy.
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Old 04-03-2015, 02:38 PM   #5
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+1 what soupxcan suggests. Thats exactly my advice also. You will likely have increased your portfolio in thise first ten years to cancel policy 10T and then addl half mil at lower monthly rate is plenty


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Old 04-03-2015, 03:15 PM   #6
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Yes. If you think you have an insurance need, 20 year (decreasing?) term would seem good.

Do you want to fully replace lost earnings? Is there a rule of thumb? 20x gross/net income? Your $1mm each seems reasonable.


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Old 04-03-2015, 04:01 PM   #7
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My wife and I are mid-30s, no kids, NW ~$1.2M with about $750K invested assets. We took out 25-year term coverage of $600,000 for each last year which would cover paying off the mortgage and the estimated expenses to get at least one (but likely two) kids through college.

It is my intent to either (1) let the term run its course; or (2) cancel when we are totally financially independent and my pension survivor benefit is locked in. I suspect we'll go somewhere in between and will frankly be surprised if we're still carrying those policies by age 50.

We pay around $900/yr for that coverage, and it gives us peace of mind. I'd recommend it, especially young. That said, do you really need $1M in coverage? What would you absolutely want paid off in the event one of you died? That's how we came up with our number - pay off the house so there's always a roof, then plan for the next biggest expense. Everything else should be handled by either of our jobs fairly easily.
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Old 04-03-2015, 04:37 PM   #8
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Quote:
Originally Posted by pb4uski View Post
The thing to think through is if you got run over by a beer truck tomorrow, would there be enough between the assets and DW's earnings for your DW and kiddo to live as you would like, funds for college, etc. Then do the same if DW got run over by a beer truck.
I agree with this summary. The standard rule of thumb is 10x your income but you've got other assets to consider. I bought a 20 year term that I thought was astronomical in 1990 but by the time it expired in 2010 it didn't look so big. We were definitely FI and no kids were involved. To a certain extent I think DW should have been able to take care of herself and not have needed the insurance for the last 5 years or so.

Run the numbers. I think $1MM on both of you isn't going to be too far off although you might feel comfortable with less.

In case you haven't lookedcompared, the insurance offered by your company is pretty expensive compared to what you can get in a separate policy. This insurance also goes away if you lose your job. Stay away from that junk.
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Old 04-03-2015, 04:58 PM   #9
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I agree with most of the others in thinking that it's a good idea for you. As far as the 20 year vs. 20+10 years or whatever, keep in mind the effect of inflation on the cost of the policy. I bought a $.5M 30 year term policy when I was 44, as that seemed to be the proper amount to allow DW to get by without me based on our assets at the time. Since then I've FIREd, and our assets have grown to the point that the insurance isn't really needed. However, the cost of the payments has become relatively insignificant so I've kept the policy going, figuring it's peace of mind insurance for DW, since she's never really bought into the idea that we're really FI. She believes it, but she doesn't really BELIEVE it, IYKWIM. So anyway, after 10 years or so you can make the decision to drop the policy or keep it going because it's easy to afford at that point.
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Old 04-04-2015, 09:04 AM   #10
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I agree with this:
Quote:
Originally Posted by pb4uski View Post
The thing to think through is if you got run over by a beer truck tomorrow, would there be enough between the assets and DW's earnings for your DW and kiddo to live as you would like, funds for college, etc. Then do the same if DW got run over by a beer truck.
.
Since you haven't specified how much you're currently spending, or how much the survivor might earn, or whether the survivor would want to work, it's impossible to know how much it will take to maintain the survivor's lifestyle.

People are just guessing that $1.1 million in savings and living in a $500k house probably means you're a high income couple and accustomed to higher-than-average spending.

I wanted to be in the position where if one of us died, leaving the other with small children, the survivor could afford to quit paid work and stay home full time with the children. (If the survivor chose to work, any after-tax, after-work-expense earnings would be available for quality child care.)
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Old 04-04-2015, 09:17 AM   #11
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If i'm your DW, I'm saying yes....
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Old 04-04-2015, 10:31 AM   #12
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Current spending excluding the mortgage and child expenses is $75k. 10x my income would be $2.0M which seems high today, though might not seem that way in 20 years.

My employer provides an accidental death policy which pays out a couple times my salary, but as I understand it that is only for sudden and accidental death, so would not cover things like cancer for example.

I like the idea of an ART policy, was not aware of that option.
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Old 04-04-2015, 11:52 AM   #13
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Originally Posted by soupcxan View Post
Current spending excluding the mortgage and child expenses is $75k. 10x my income would be $2.0M which seems high today, though might not seem that way in 20 years.

My employer provides an accidental death policy which pays out a couple times my salary, but as I understand it that is only for sudden and accidental death, so would not cover things like cancer for example.

I like the idea of an ART policy, was not aware of that option.
Now, if you die, you won't be here, so your food, clothing, medical care, and entertainment expenses go away. But, your wife will have food, clothing, medical care, toys, etc for a child. And, you won't be around to do handy chores, including some child care. So $75k might still be as good as any guess.

Your wife could quit work and become a full time mother. She and the child would get SS benefits up to 1.5x your PIA (check your SS statement). I'll guess $25k.

So she'd want $50k for, let's guess, 16 years. That's $800k.
She'd also want to pay off the mortgage for another $250k.

That leaves the whole $1.1 million to fund college, help transition her back into the workforce, and provide a big chunk of retirement savings for her. Maybe you'll say that's excessive, and decide to carve out $XXX,000, and cut the life insurance by that amount.

As I said above, she may decide to continue working. But, she'll lose some of the SS, she'll pay more taxes, have work-related expenses, and need to find quality child care. IMO, those things could chew up her entire earnings as long as the child is small. So, I don't do a lot of offset for her earnings. YMMV.

Presumably, the same math works for her life insurance.

We're way below $2.0 million. The original gut feel of $1.0 million seems in the ballpark.

Theoretically, you'll need less insurance as your assets grow. But, if your income and lifestyle also expand, you may find that you have more to replace. Some people do layers, half in a 10-year policy, half in a 20-year.
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Should I buy term life insurance?
Old 04-05-2015, 04:26 PM   #14
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Should I buy term life insurance?

Your big unknown is kid on the way...last I checked they don't come with warranty.

So, plan for insurance income such that one of you not being there and the other having to take care of the kid full time ( at least a decade, more likely nearly 2 decades) and not being able to work or working but paying a truckload in child care, tuition etc let alone the mortgage and monthly utility bills. Health insurance etc.

20 year level term is cheap. 10x your current household take home pay is a good insurance pay out number to shoot for. 15x is a good overall number adding in value of your current assets + primary residence
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Old 04-05-2015, 07:35 PM   #15
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I got quotes from one insurer for $1M policy:

20 year: $970/year
10 year: $680
ART: $440

Maybe a little lower after a physical.
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