How much Term Life??

[devo]

I did some searching and couldn't come up with enough. Please link me to some good discussion if this has you've all been down this path before.

Could use some help on this one. I'm hoping to get a consensus from you folks about how much Term Ins. DW and I should hold. DW and I are 32 with two young children. Jobs are fairly secure (mine in public school). We hold a significant mortgage on our primary residence. We have an emergency fund of four months or so.

At this point we both have term enough to cover the pay off of the house. But I've heard everything from "enough to pay off the house" to "20 times annual earnings". Wow!! That could be alot of insurance. Is 2 or 4 million dollars of term insurance realistic? What is reasonable? What do you youngsters have? I understand that as you age and become F.I. the idea of LI changes a bit. Just trying to get a general idea and maybe some philosophy to guide our decisions. OH, and what should I be paying for this assuming solid health and habits. I have access to USAA, which I believe to be of good credit and service.

Thanks again, always appreciate the power of the "ERF Index"
O0
devo

 

[crazy connie]

Enough when invested (along with SS) to provide adequate income to replace your wages and know that kids and spouse can live a reasonable lifestyle. Not rich, just reasonable. Some expenses go up with the loss of a spouse. Think about those items as well like yardwork, or daycare, or domestic help etc...

 

[laurence]

We had a long thread on this a while back, got quite contentious as some advocated "If I'm dead, who cares about my family".

I carry ten times my annual wages. DW won't be able to SWR and ER off of that, but will be able to pay off the house and not work for a couple/few years and figure out what she wants to do.

 

[Peaceful_Warrior]

This is basically about what I figure as well.

To give the original poster some sense of where I'm at:
- I am 29 with a low six figure income and a newborn (just last week) and my wife intends to stay at home. We carry a $350k mortgage and have probably about $100k in assets (about 3/4 in IRAs and 1/4 in Taxable) not including home equity.

- I have Term of 1x my salary through my employer. I could go up to 4x for additional charges, but found that it's cheaper to by private Term than get it through my company group rate. I don't count this in my overall calculations because I could lose my job and no longer have access to it.
- I have Whole Life of $100k and a $150k Term Rider
- I have Whole Life of $250k

So total currently is $350k Whole Life and $150k Term (bought at a time when I didn't understand the concept of buy term and invest the difference). Now that I've had it, no sense in getting rid of it.

That said, I'm currently in the process of getting a $1m Term policy (Med Exam is tomorrow actually). I figure with $1.5m total, my wife would be able to invest it all and live reasonably. I've already advised her to NOT pay off the mortgage (because this is unwise financially for the long term, it just sounds nice in the short term).

I'm also considering getting a $1m policy on her, so that if she were to go, I would be able to quit my job and care for our child full time. However, due to some of her past health issues (that haven't been relevant for over a decade), she may cost more to insure than is worth it at this time. If I didn't have good family support, then I would probably get the $1m Term for her, but considering if I need help I can get it then I'm not in as much of a bind without her as she would be without me.

General rule of insurance -- insure what you can't afford to cover on your own, and once you can afford to self-insure then drop the insurance and invest instead.

I hope this helps!

Enough when invested (along with SS) to provide adequate income to replace your wages and know that kids and spouse can live a reasonable lifestyle. Not rich, just reasonable. Some expenses go up with the loss of a spouse. Think about those items as well like yardwork, or daycare, or domestic help etc...

 

[laurence]

I have small quibbles with your plan, but it's close enough to mine ( and your age, income, family stats are scarily close enough to mine!) that devo can just shoot for our ballpark without any regrets.

ooh, but devo, don't miss his comment about avoiding whole life. Term + invest difference in cost = good.

 

[jazz4cash]

I always heard 5x income was the rule of thumb. When we were 30ish and and kids were young, I ran those numbers and it worked even when spouse was home with the kids. Obviously the insurance would be com bined with retirement savings and so forth. Don't forget to include SS death benefit.

Now that we have moved to a much more expensive region of the country, the figure is more like 8-10 times and thats with more savings!. Point is the number varies significantly, especially if you live in an area where housing is more expensive.

 

[justin]

I have two young children as well. I don't know if you qualify for social security survivor's benefits, but most folks do. The payments are very generous (in my opinion). You might be looking at ~$2000/month in benefits payments while your kids are under 18. In my neck of the woods, that would cover a substantial portion of our family's living expenses in the event me or DW experiences a premature demise.

I have chosen to go "bare" - I only have the $50k or $100k through work for free, and DW has ~150k through work for free. It would be enough to pay off the mortgage, and the SS survivor's benefits would pretty much pay all the other living expenses.

Also consider your investments. I have my investment portfolio that could spit off around $1000/month at a moderately safe withdrawal rate. This plus the SS survivor benefits would have my family set.

Term insurance is cheap, but why pay for something if you don't need it? It's a personal decision depending on your situation.

 

[saluki9]

I wouldn't look at it in terms of income, but instead of a multiple of expenses.

I carry $2M right now which I will increase some time this year because I just signed on a large mortgage. Count me in as falling into the side letting her do whatever she wants if I die. I want my wife to be able to pay off the mortgage and live in the way she has become accustomed to. I certainly don't want her to have to go find another guy just to support her, and I would never plan on the government helping.

Because you are teacher, check with your union or other associations to see if you qualify for some special rates. I get a good chunk of my term through the AICPA which has an entire separate police form and rate classes for CPAs. On top of that, whatever is left over at the end of the year after expenses and death claims are settled is paid back to policy holders. I get almost half my premiums back every year.

 

[FinanceDude]

I wouldn't look at it in terms of income, but instead of a multiple of expenses.

I carry $2M right now which I will increase some time this year because I just signed on a large mortgage. Count me in as falling into the side letting her do whatever she wants if I die. I want my wife to be able to pay off the mortgage and live in the way she has become accustomed to. I certainly don't want her to have to go find another guy just to support her, and I would never plan on the government helping.

Because you are teacher, check with your union or other associations to see if you qualify for some special rates. I get a good chunk of my term through the AICPA which has an entire separate police form and rate classes for CPAs. On top of that, whatever is left over at the end of the year after expenses and death claims are settled is paid back to policy holders. I get almost half my premiums back every year.

A common formula used by planners is 8-10 time annual earnings, particularly if children are involved. If one makes $50,000, then 8 time is $400,000, which withdrawn at 4% would be $16,000. Not enough to replace the income, but helpful...............

 

[brewer12345]

First the insurance part: You want a 20 year level term or an annually renewable term (ART) policy. Now whole life. Not universal life. Not variiable universal life. Not return of premium term. Just plain old term life either 20 year fixed or annually renewable. I would shop at the following companies: USAA, TIAA-CREF, Ameritas Direct, and maybe Protective Life (aka West Coast Life and Empire Life). All of these companies will sell you a policy directly, do right by you, and have very good to unbelievably spotless credit quality.

How much do you need? I carry enough so that DW would be at a SWR level with assets if I drop dead. Keep in mind that SS gives survivor benefots that are pretty generous and take your assets into account. For us, this translates to 1X my base salary from my employer plus a 1MM 20 year level term from TIAA. We also carry 500k term on DW, since I would be arsed if something happened to her (she stays home with the kids). We tried to get a 1MM policy on her, but the insurer wouldn't go that high given that she wasn't working.

Others have different views and just want to cover the mortgage, etc. I don't agree with that philosophy, but YMMV.

A final note: if you are healthy, young, and buying term life, insurance is very cheap. So buy a little more than you think you need. You won't miss the 20 or 40 extra bucks a year, but if your policy ever pays out your survivors will be thankful in an otherwise difficult time.

 

[SecondCor521]

I always figured enough to make my death a *financial* non-event for my wife. I didn't want her to have a windfall (worth more dead than alive issue) and I didn't want her or our kids to suffer a lifestyle hit (in addition to the great trauma my untimely demise would cause ;-).

As of a few years ago, when we were both in our mid-thirties, I was making a good salary, we had good savings set aside for retirement and college that could be tapped, there is SS survivors benefits, and she was a SAHM, we had a $500K policy on me and a $250K policy on her, which was about right. Both of these were level 20 year straight term policies issued when we were both healthy, at a total monthly cost for both policies of about $26 a month IIRC. By the time the policy lapsed I figured we would be self-insuring, because every year that passed our assets would grow and the kids and spouse would need one less year of support.

I would add that John Hancock was who we had the policies through, and I really liked them a lot. The prices were reasonable, they had good credit quality, their policies were actually quite understandable and precise, and their customer service was always very good.

2Cor521

 

[Rich_by_the_Bay]

Can't think of a better rule of thumb than 20-25 times your annual expenses, less your current net asssets - just like retirement planning. Add a bit if college tuition lies ahead. Note, expenses, not income. And benefits should be tax-free if paid by after tax dollars, right?

Spending 80K, have 200K saved: 80 x 20 = 1.6 mil, less 200k of savings = 1.4mm.

 

[Peaceful_Warrior]

First the insurance part: You want a 20 year level term or an annually renewable term (ART) policy.

A final note: if you are healthy, young, and buying term life, insurance is very cheap. So buy a little more than you think you need. You won't miss the 20 or 40 extra bucks a year, but if your policy ever pays out your survivors will be thankful in an otherwise difficult time.

I agree on both of these points. I debated a 10yr Term on the $1M policy I mentioned, but decided that the extra cash was well worth getting the 20yr in case anything happens to my health in the next 10 years and it would make me either uninsurable or too expensive to be worth it.

Also, I debated a $500k policy, and decided that because I was young and healthy the $1M was the way to go. All I know is that if I'm gone, I don't want my family to ever have to worry about money again.

 

[HFWR]

Whatever I get free from w*rk... 1x salary.

 

[simple girl]

I agree on both of these points. I debated a 10yr Term on the $1M policy I mentioned, but decided that the extra cash was well worth getting the 20yr in case anything happens to my health in the next 10 years and it would make me either uninsurable or too expensive to be worth it.

Or if anything happens to someone in your family. We decided to upgrade my life insurance policy this year (realized we hadn't purchased enough). They lowered my rating not due to anything in my personal medical history...but due to the fact that 2 family members under the age of 70 (I think) had passed due to heart attack (my mother and sister).

 

[Peaceful_Warrior]

That's the same reason mine gets docked -- my dad had a heart attack (and lived) and I still get dropped on my rating.

Or if anything happens to someone in your family. We decided to upgrade my life insurance policy this year (realized we hadn't purchased enough). They lowered my rating not due to anything in my personal medical history...but due to the fact that 2 family members under the age of 70 (I think) had passed due to heart attack (my mother and sister).

 

[dumpster56]

A 350K mortgage. ouch. I hope its fixed.

 

[saluki9]

A 350K mortgage. ouch. I hope its fixed.

I signed on a $417K mortgage this week. Sure makes it an easier decision to get up for work in the morning

 

[Peaceful_Warrior]

3/1 ARM that's slated to go up in a little under 2 years from now. However, I'm pretty certain we'll be moving by then which is why I got the ARM in the first place.

Hopefully moving to an area with a lower cost of living, so I can carry a $200-$300k mortgage with zero down and invest my current equity at a better rate.

A 350K mortgage. ouch. I hope its fixed.

 

[MikeK]

My advice is to buy 2x what you believe you need. This is based on two factors:

1. Term insurance is cheap and best to purchase when you're young.
2. In 10 or 15 years that $500K policy won't seem like enough. Your expenses rise as the kids get older and inflation over a 10 year period reduces considerable purchasing power.

The issue is figuring out "what you need". I personally buy life insurance to keep my DW happy. I believe we already have enough money so neither of us has to work. However, there are always unexpected occurrences in life. The cost for my $750K policy is very low and makes my DW very content.

The extra coaching is to insure your wife will know how to manage the money when you're gone. I'm seen too many situations where the widow ends up allowing some unscrupulous person manage the money or she just puts it in a bank CD. People are especially vulnerable after a spouse passes away.

Mike

 

[martyb]

I'm 49, DW is 46 and we have $96K remaining on our mortgage, although we are planning to downsize shortly & pay cash, or almost cash. I currently carry somewhere around $600K in Term life insurance, no whole life. I had a small whole life, but cashed it in some time ago to fund other pursuits. The $600K is on me, DW is insured for approximately $125K. 2 of my 3 kids are grown & on their own, a 17 yr old remains at home till I can kick him out he decides to strike out on his own. He currently says he is moving to California to be a professional poker player. :

 

[pinkmali]

A few of you mentioned the history of family members playing a role in the policies. How did the insurance companies find out about them? I'm assuming through a questionaire... Do you have to tell? I'm getting ready to increase our insurance and would prefer to not let anyone know my dad and his brother both had heart attacks at 45

 

[SecondCor521]

A few of you mentioned the history of family members playing a role in the policies. How did the insurance companies find out about them? I'm assuming through a questionaire... Do you have to tell? I'm getting ready to increase our insurance and would prefer to not let anyone know my dad and his brother both had heart attacks at 45

They will ask, if you don't tell then you'll be committing fraud on the insurance company. After you die they may do a more thorough investigation of your family history and if they discover the fraud they will probably decide to just return all the premiums you paid (sans interest, of course) instead of paying the death benefit. This will all be in the legal fine print of the policy.

2Cor521

 

[Jarhead*]

They will ask, if you don't tell then you'll be committing fraud on the insurance company. After you die they may do a more thorough investigation of your family history and if they discover the fraud they will probably decide to just return all the premiums you paid (sans interest, of course) instead of paying the death benefit. This will all be in the legal fine print of the policy.

2Cor521

While it's true, that you taking a risk by purposely ommitting certain details on a life ins. application, any life policy I've seen is not contestible after two years. They will even cover suicide after the two year period of issuance.

But remember this is free information

 

[SecondCor521]

While it's true, that you taking a risk by purposely ommitting certain details on a life ins. application, any life policy I've seen is not contestible after two years. They will even cover suicide after the two year period of issuance.

But remember this is free information

Umm, I think that only applies for the cases where you die of something you disclosed, or suicide as you note. I don't think the 2 year period covers fraud.

2Cor521