Does Term Life Insurance make sense for us?

[potto0213]

Hello All,

I am planning on retiring in 18 months at age 61.

My wife is already retired. She is receiving a pension of about 40K per year (3%/year COLA). I will receive SS of about 24K per year when I reach age 66.

If my wife dies, I will not receive any of her pension and if I die she will not be eligible for SS survivor benefits.

We have about 250K in taxable savings and 500K in IRA's and 403b accounts. However, I will need some of the taxable savings to bridge the gap from 61 to 66. So I guess I would subtract 24K * 5 = 120K from the taxable saving to bridge the gap.) Also, there are a number of expenses that surely will pop-up in the next 5 - 6 years. (Replace a car, new furnace/air conditioning, paint house). Also, my health insurance is through an individual policy and is only going up each year.). So I would subtract another 50K to allow for these expenses. That leaves 80K in taxable accounts and in taxable accounts and 500K in tax-advantaged accounts. A 3% withdrawl rate (to be on the safe side) would indicate that we could take 16 - 17K per year from these accounts and be reasonably safe. Tha total income stream of 40K + 24K + 16K = 80K/year. I am sure we could live on this very comfortably.


Retiring knowing that in a worst case scenario one of us might be forced to live on a reduced income stream makes me uncomfortable. Knowing myself as well as I do I suspect I will try to live miserly during the ages of 61 - 66 and not allow myself to enjoy retirement as much as I had hoped (in other words I see myself cutting back on travel, entertainment, etc. just to try to make sure we are good in the long run). Even after I reach age 66 the loss of income to us would be disturbing. So i am contemplating taking out a 15 year term life insurance policy on both of us. (I think at age 75 our living expenses will decline and we should be able to get by on a lower income stream). Online quotes indicate this would cost us about $300 per month for a 500K policy for each of us.

Does this make sense or am I worrying too much about something that probably won't ever happen.

Thanks for your help in advance.

 

[chinaco]

That is one of the reasons to use life insurance... loss of income when a family wage earner passes on.

If you are that concerned about it, perhaps you might consider continuing to work a year or two longer than your current plan?

 

[dgoldenz]

For a 60 year old male - I came up with $157/month for $500k 15-year term and in perfect health. At standard rates, the $300/month you came up with for yourself looks about right. The difference in rates for a 20-year term policy aren't massive if you want to build in a little wiggle room. Difference is about $60/month at best risk class, $100/month at standard risk class.

For a 60 year old female (post didn't mention her age) - $500k 15-year term at best rates is $101/month, at standard rates is $200/month. 20-year would be $147/month at best rates and $284/month at standard rates.

If you would receive none of her pension, you would obviously have a much greater total income loss when factoring in the 3% COLA if she passed away first. Over 15 years that would be about $750k, over 20 years about $1.1M. You may want to consider a larger policy on her and a little smaller policy on yourself given the difference in income loss. Health underwriting may be a determining factor though if one of you are healthier than the other. Rates for women are lower than men due to longer life expectancy.

 

[dandan14]

OP, I think you are thinking about things correctly -- for the most part.
A couple of questions:
What is your current cost of living?
Does your wife get SS in addition to her pension?
Do you have long term care insurance?

Since you will be 61 in 18 months, I'm assuming you are 59 now. This means that 66 is your "full retirement age" in SS language. If you take SS early, you could do at a cost of 1/180th of your benefits for each month early (i.e. 36 months early = 20% reduction in benefits). While you may think that option gives up future earnings (and you may be right depending on how long you live) it does give you a much more predictable income.

 

[Emeritus]

I suspect you are working from the wrong starting point. You say :

Retiring knowing that in a worst case scenario one of us might be forced to live on a reduced income stream makes me uncomfortable.

But the deceased has no "consumption stream" so expenses are somewhat reduced.

you can only enhance consumption later by reducing it now. Does that make sense in your case?

The most important question is where are each of you if the other dies? Since if either dies the survivor gets the assets you only have to look at pensions and SS.
At the moment she is already better off than you are since her pension is larger than your social security. Insuring her to make up the difference makes sense, but not insuring you. If the difference is 16000, an annuity for that amount can purchased or insurance can be bought that yield equal the same amount.

My wife an I have exactly the same issue. My DB pension is larger than hers so I carry insurance but she does not. I will be 72 when the term insurance expires. At that point purchasing an annuity for DW's life makes some sense for us.

 

[LOL!]

But the deceased has no "consumption stream" so expenses are somewhat reduced.

Sometimes taxes for a single person are a higher percentage of expenses than taxes for a married couple. That is, expenses can go up in odd ways.

 

[Emeritus]

Sometimes taxes for a single person are a higher percentage of expenses than taxes for a married couple. That is, expenses can go up in odd ways.

Sure but not enough to change the cold dead stiff facts

We have made our arrangements so that either survivor would have 3/4 of our joint income

 

[Independent]

I'd do a little more thinking about why "living on a reduced income stream" if one of you dies is a problem, especially since $80k is "very comfortable".

Our expenses are split about 1/3 to cover the house and a couple other "both of us" expenses, then 1/3 for each of us as individuals. I'd suggest that you look at your spending and see if that isn't true about you.

In that case, either of you would need $54k to continue your $80k lifestyle. Your wife has $56k without you, so she's in fine shape. You have $40k without her, so maybe you could argue that you need $14k of contingent income. Even a 3.5% withdrawal rate says you would only buy $200k of face amount on her life.