Role of life insurance

[Arif]

This may sound stupid but I have never understood the role of having life insurance. From what I do know it is suppose to replace the income for x number of years if one of us passes away. What happens if your income continues after you  are dead. If your income in generated from retirement accounts and rental property what is there to replace? What am I missing? If it is needed how much should you have?

 

[Martha]

I always thought life insurance was (1) for the young, who need to replace income in event of untimely death, (2) for the rich, who want a source of cash to pay estate taxes, and (3) for business owners who want a source of cash to buy out the interests of owners who die.

 

[brewer12345]

Assuming we are putting estate planning tax issues aside, the main reason you would need life insurance is if your assets couldn't carry your survivors for the rest of their lives.  Since your asets appear to more than carry your survivoors, I wouldn't bother with life insurance in your shoes.

I plan on cancelling my policy and DW's when we are financially independent.

 

[JPatrick]

Need insurance?  Simply jot down the financial impact of your passing on those you care about.  From that exercise you can figure the amount you want/must leave behind.  If your investments don't cover the total you may be a candidate for fill the gap insurance.
Example:: Single college kid with no debt.  The financial impact of his/her passing would likely be a funeral. 
Example:: Young couple with 3 kids and no investments.  Lots of insurance needed here. In the millions.
Example :: Retired.  Hopefully your  investments have blessed you with the title "self insured."

The above is the traditional thinking, but you may want to watch those fringe issues that can pop up.  Such as, if you leave behind a paid for 250K house in big tax Texas you are leaving a $7250 tax bill also, and that's every year forever.

 

[grumpy]

I dropped my life insurance when I retired. My pension provides a survivor annuity for my wife and our other assets are more than adequate to keep her in the style she has become accustomed to.

Grumpy

 

[Eagle43]

No life insurance here. I have some insurance on the military pension. DW has plenty of money in the Index Funds to carry on, after my demise, at 100 years of age .

 

[dunc0029]

I have free life insurance through work ( 1* salary ), but I otherwise wouldn't have it (single, no dependents and more than enough savings to cover a funeral ).  I work in the insurance industry.  This is self-evident, but all insurance is a bet against yourself - that you are less lucky than the typical person.  On average, a person will pay more for insurance (auto,life,health,home,etc.) than they will ever get in benefit ( obviously the insurance company needs to make money to exist ).  That said, once you have sufficient $$$, you can often self-insure and save yourself money, on the average.

 

[SteveR]

I have free LI at work to cover 2X salary. I also carry $50K on my DW since it is very cheap. My late wife was not insurable so no LI. I will continue to carry LI on both of us until we retire and then we will just self-insure. I have an old whole life policy (I know :) but it will be fully paid up in a few years and the cash value is now worth more than the insurance value. Once it is paid up I will just keep it as a cash hedge on the cash value or just let it flow into my trust after I die.

 

[73ss454]

Purchased a Whole Life Policy about 18 years ago for 500K. Not the brightest thing I've ever done and the agent did nothing but lie to me about the premiums.
Originally I was told that I was to pay for only 10 years and then it would pay for itself.
(LIE).

Well I paid for 14 years and then I was told that it would now pay for itself. Last month I was told that I would have to start paying again because the policy is not paying enough in interest.

I will cancel it next year and the cash value with be about 130K.
I can only look at it as a forced savings I guess.

 

[justin]

Young, with child. Minimal life ins. (low six digits through employer and a loan forgiveness agreement for student loans). Significant liquid assets, equity in our home. Grandparents are childcare. Cheap health ins. through employer for family. Wife just got a job, so we are used to living on one salary. If wife or I have an untimely demise (isn't it always untimely), the life insurance we do have can pay off the house and then some. Our substantial investments could support us without working for years and years at our current

Reasons for minimal life insurance:

1. SS Survivor benefits - these are huge! Around $2000/month for the surviving spouse plus kid till she's 18. Then ~$1000/month for life for spouse.

2. Not much worse off in the event of the death of a spouse than if we were to get divorced. Either taking care of kids with minimal child support or paying child support would take a significant share of income from a newly formed single income household. Divorces are unfortunately extremely likely (25%-50% chance of occurence). Premature death at a young age - based on life insurance quotes I've seen, odds are no worse than 1 in 1000 to 1 in 4000.

3. Moral Hazard - don't want to be worth more dead than alive. I know and trust my wife, but you never know about others around you in the world. No one I distrust in particular, but I think my paranoia would get to me

The SS survivor benefits and our substantial investments could support us without working for years and years at our current standard of living.

The guys at work think I'm crazy, but I've got bigger risks to worry about than a 1 in 4000 annual mortality risk. The survivor of my wife and I would have to adjust eventually to a premature demise of the other, but things would be fine financially.

 

[azanon]

Assuming we are putting estate planning tax issues aside, the main reason you would need life insurance is if your assets couldn't carry your survivors for the rest of their lives

Generally speaking, i do not agree with this. Why should anyone feel obligated to completely replace themselves, as if the people left behind have no ability to adjust to the new situation.

Take me for instance. I have a wife and one kid. My wife is a knockout. I know plenty of men that would "adopt" a free kid (a damn cute one too), and take care of her, for the opportunity to sleep with her every night. I have no question in my mind my wife could replace me with a new husband. I have little doubt she could find one too with a decent job.

I have 100K insurance policy, not counting my assets and the benefits that SS would give her. That's more than enough IMO to give her time to adjust to a new life. Granted, i have an ace in the hole too (~ rich parents who would see to it that she isnt abandoned).

 

[brewer12345]

Generally speaking, i do not agree with this.  Why should anyone feel obligated to completely replace themselves, as if the people left behind have no ability to adjust to the new situation. 

[Discussion of "pimping DW from the grave" snipped]

Az, I would much rather my survivors have options if I keel over early. My wife has two Master's degrees from Columbia; I have no doubt she could manage to keep meat on the table in my absence. But that would mean my kids would be put in day care and my wife would have to make some awfully hard choices. For the couple hundred bucks a year in premiums I'd save, its not worth it.

 

[Martha]

My wife is a knockout. I know plenty of men that would "adopt" a free kid (a damn cute one too), and take care of her, for the opportunity to sleep with her every night. I have no question in my mind my wife could replace me with a new husband. I have little doubt she could find one too with a decent job.

Or she might decide to ditch you and all the other guys, and take care of herself.

 

[HFWR]

Or she might run off with the nanny...

(obscure reference from "You've Got Mail"...)

 

[laurence]

Reminds me of a Sting song, something about, "If you love someone, set them free."  I carry $600k in term life and it costs me about $20 a month.  I don't want my DW to have to pair up with the first guy she meets just to stave off poverty.  Another song, Dixie Chicks' "Goodbye Earl" comes to mind.  

Even if your DW is a stay-at-home, she is still providing a valuable service to the family unit.  Looking at it like a business, she sacrificed future earning potential (career) to meet goals that are mutually beneficial (i.e. raising kid w/o daycare).  If I die prematurely, I've failed in my contractual obligations (obviously not on purpose, but that's irrelavent).  I'm happy to pay an extra $20 a month as a contingency.

 

[JPatrick]

Now I know why my neighbor has so much life insurance 
Shall we say. um, well his wife is sort of not a knock out.
Wait til I get a few Coronas in me and get the courage to let him know the cat is out of the bag. 

 

[moretolife]

I was planning to post a life insurance question tonight and saw this discussion. After reading this thread, I think I can guess what you will say, but here goes anyway...

My husband and I are both 55. Our children are all financially independent. We have each carried $200k term life for a long time. My husband retired 18 months ago. He has some serious health problems and is nervous about dropping the insurance. I plan to continue my life insurance until I retire to protect him if I should drop dead in the near future. At our ages, I expect our premiums to increase dramatically. Currently we are each paying a little over $700 a year for our policies. Is this a waste of money?

 

[haha]

Assuming we are putting estate planning tax issues aside, the main reason you would need life insurance is if your assets couldn't carry your survivors for the rest of their lives.

I could never quite see this.

Untimely death is a misfortune, certainly for the one who dies. Shouldn't at least some of that misfortune be shared by his survivors? Since almost all woman today are trained to work at something, it seems to me that one needs only enough life insurance to to get the kids to school age, and if the widow isn't current in her skills, to give her time to become current. A lot less than life for a 28 year old mother! Also, it's not like widows lose all attractiveness in the big marketplace of love. 

Reverse he/she, his/her, man/woman, widower,/widow in the not infrequent case where the woman is the main or only breadwinner.

Ha

 

[laurence]

A lot less than life for a 28 year old mother! Also, it's not like widows lose all attractiveness in the big marketplace of love.

Yeah, but I don't want any uther ma-un tuchin' my womun. That's wuh I have in muh will that I'll be stuffed and set on the couch as a remembrance of her vows!

 

[brewer12345]

I could never quite see this.

Untimely death is a misfortune, certainly for the one who dies. Shouldn't at least some of that misfortune be shared by his survivors? Since almost all woman today are trained to work at something, it seems to me that one needs only enough life insurance to to get the kids to school age, and if the widow isn't current in her skills, to give her time to become current. A lot less than life for a 28 year old mother! Also, it's not like widows lose all attractiveness in the big marketplace of love. 

Reverse he/she, his/her, man/woman, widower,/widow in the not infrequent case where the woman is the main or only breadwinner.

Ha

I repeat: My wife, like many/most, is fully capable of supporting herself and the kids if necessary. However, I like to think that my untimely passing would be a great loss (financial and otherwise) to my family. As such, I'd prefer to err on the side of a little extra cushion to give them more options. Since the difference in premium is a couple hundred bucks, its not like its any great hardship.

 

[Martha]

I was planning to post a life insurance question tonight and saw this discussion. After reading this thread, I think I can guess what you will say, but here goes anyway...

My husband and I are both 55. Our children are all financially independent. We have each carried $200k term life for a long time. My husband retired 18 months ago. He has some serious health problems and is nervous about dropping the insurance. I plan to continue my life insurance until I retire to protect him if I should drop dead in the near future. At our ages, I expect our premiums to increase dramatically. Currently we are each paying a little over $700 a year for our policies. Is this a waste of money?

If you need it to maintain the financial independance of the surviving spouse, I would keep it. So far the cost isn't so bad.

 

[Martha]

This discussion reminded me of a post a while back. This is why life insurance if you still have children at home can be invaluable:

I am in a similar situation. I lost my wife suddenly and between survivor benefits and life insurance I have been able to stay at home (just over a year so far) and care for our 2 children. I'm 43. My wife and I had a wonderful marriage of 15yrs (plus a 5 year courtship) and were still very much in love. I'm not sure we were loving our respective careers and we both were saving madly to ER at 55.

I know there aren't any guarantees attached to tomorrow, but still it's a bitter pill to swallow watching so many long planned for dreams go away in an instant (as I'm sure we're all reminded of by Katrina).

Even given my own profound grief (an exhausting state), 2 grieving preteens (and all their associated needs), a house to keep together and several pets, people still ask..."so, when are you going back to work?", or..."what DO you do all day?" Yesterday someone asked me if I was retiring early, I answered that I wasn't sure that raising two kids alone while keeping a house together was my idea of "retirement". Its a full time commitment (that is much more important than my old job). In most cases I just say that I and my kids are fortunate that I am able to stay at home for "awhile" and time will tell with the work thing. I think that says all they need to know of our financial situation.

If staying home allows you to get done what needs to be done and most importantly gives you quality time with your loved ones, you should do it and be commended. I know I would be a completely different animal (as would my kids) if I had to pick them up at the end of a long workday, tired and grumpy, to take them out to another carry-out meal followed by grocery shopping, laundry, errand running, lawn mowing, snow blowing, bill paying...etc...etc.

I have a whole new appreciation of single, working parents and all they do.

My parents did not have life insurance. They often spoke of what to do if my father died as he had a number of health problems. Instead, my mother with no apparent health problems died suddenly in her 30s. Our family struggled for years to keep things together. Life insurance at least would have removed some of the financial pressures.

 

[uncledrz]

My wife and I each carried life insurance until we had enough assets so that if one of us had died before the kids were grown there would be sufficient funds to feed, clothe, shelter, educate, etc the kids. Once we got there, we dropped the insurance although it never was too costly (term is pretty inexpensive).

Sure, my wife is beautiful, but I never wanted to count on anyone else (including the government) to take care of the kids.

Sure my wife had her own career, but a single parent has a great deal more responsibility than each parent in a dual parent household.

Always felt that we brought the kids into this world, and had a responsibility to take care of them.

Uncledrz

 

[sgeeeee]

DW and I both worked as electrical engineers.  We both held jobs that paid more than we needed to live.  We had no kids and no parents requiring care.  

We never had life insurance.  We couldn't figure out what we would be insuring against.  

 

[azanon]

Az, I would much rather my survivors have options if I keel over early.  My wife has two Master's degrees from Columbia; I have no doubt she could manage to keep meat on the table in my absence.  But that would mean my kids would be put in day care and my wife would have to make some awfully hard choices.  For the couple hundred bucks a year in premiums I'd save, its not worth it.

Again, for clarity,  i wasnt advocating the extreme opposite of your extreme (which would be literally replacing yourself forever, monetarily).   I have a plan that would give them plenty of money and resources, measured in a few years, to adjust to the new situation of me not being there.   I, along with Haha, agree that the unfortunate burden of my demise should be shared by everyone, including myself.   Its not like I intentially broke "the contract" you referenced.

If life were supposed to be easy, perfect and predictable, i'd go with that and provide an insane life insurance policy.  But its not, so why should I struggle to make life something its not.   I'm sure everyone in my family, including myself, will be dealt plenty of curveballs over the course of a lifetime.  If you ask me, that's what life is all about.

As an aside, I am an extremely careful and healthy person.  My early demise is unlikely, to make the most extreme of understatements.