Life insurance

[kimmarg]

Hi, we are expecting a baby very soon (3-5 weeks, eek!) we would like to get life insurance so that if something happens to one of us the other would have a solid cushion or if (god forbid) something happens to both of us the family member we would ask to raise our child would not have a large financial burden.  Baby is age 0 now, so we need what a 20 year term policy? For how much? I had figured $500k each ($150k pay off house $50k pay off/ go back to school. $30k/year x 10 years expenses) is this reasonable? Anything else I should know about the process? Do I need to wait until the baby is born so they can be the beneficiary of the policy?

[TVRodriguez]

Congratulations on your upcoming new addition!

I like your thinking. We did something similar.  One suggestion is not to name the child as the direct contingent beneficiary. I would have Wills prepared (and trusts if necessary in your state), naming the potential guardian of the child, naming the trustee in charge of the money that would pass to the child, and giving the trustee authority over the money until well past the child's 18th birthday.  Then I'd name the trustee of the child's testamentary trust as the contingent beneficiary of the insurance proceeds.  But then, I'm an estate planning attorney.

[MayDay]

If you die, your child will get ~1000/month in social security until they are 18. 

For us, we have 2 kids, so 2K a month.  Plus H has ~100K of life insurance, plus we have money in retirement and general savings.  So we felt comfortable with that fairly low life insurance amount because with the SSI, I would be fine until the kids are 28, and by then either I can get a job, or the retirement accounts will have grown plenty.

We don't have any on me, since H works FT and the kids are now in school FT.  We probably should have when the kids were younger, but since he was the breadwinner it just wasn't a high enough risk of me dying to bother doing anything about.

[JoJo]

You can change the beneficiary, no need to wait.

[kimmarg]

I like your thinking. We did something similar.  One suggestion is not to name the child as the direct contingent beneficiary. I would have Wills prepared (and trusts if necessary in your state), naming the potential guardian of the child, naming the trustee in charge of the money that would pass to the child, and giving the trustee authority over the money until well past the child's 18th birthday.  Then I'd name the trustee of the child's testamentary trust as the contingent beneficiary of the insurance proceeds.  But then, I'm an estate planning attorney.

Thanks! I had thought about something like this but wasn't sure how it all worked. Given our time scale I may just try to get a policy and then work on the other parts after the baby's arrival. I know in place before hand is a good idea but realistically, plus of course we need a name too! Plus it sounds like we could change the beneficiary after we get the policy.

I didn't know about social security that might lower the amounts. I just don't want the surviving spouse stressing, I want several years of expenses so they can decide how best to proceed.

[LiveLean]

We went with $500K on 30-year term for each of us in 2003 shortly after our first child was born. We pay $1,080 a year. Thirty years is probably too long, but I remember buying it thinking $1,080 will be pretty good when it expires in 2033 when we turn 64. Of course, we plan to be FIREd before then and hopefully living long after that.

I'm amazed how many people go without. My mom died at 51 and while my dad didn't need the money, it would have helped. It's one instance where she was too frugal; Dad bought it for himself but she wouldn't let him buy it on her.

[MrsPete]

I think your number sounds high, but I suppose you've done your math and feel sure of it. 

You don't want your child to be the beneficiary; you want the money available to raise your child, not tied up 'til the child turns 18.  You want your spouse to be the beneficiary and your child's potential guardian to be the secondary beneficiary (that is, the person to whom the money'd go if the two of you were both to die). 

You can write out instructions on how you'd want the money spent for your child (i.e., use some of the money for her to take gymnastics, be sure she gets to go to summer camp every year, buy her lots of books, be sure you set aside X amount for college -- whatever would matter to YOU).  No, your written instructions aren't legally binding, but you're trusting this person with your child -- surely you can trust him or her to follow your financial wishes!   

[calimom]

First of all, congratulations on your new addition, wishing health, happiness and long life for all.

Some great responses, here, TVRodriguez is right on the money about guardians and trustees.

As someone who was widowed at 31, with very young children, I wish this was a conversation my late husband and I had had.  We thought we were fairly responsible about money. At the time of his death (at 37, in a car crash), we had no debt, some savings and assets, but not really enough life insurance for a surviving SAHM with three children to see through college.  We had the equivalent of a year's salary through his work; and a $50K private policy.  That number really should have been $500K.  I did ultimately collect on the uninsured motorist clause of our auto insurance policy, but it took awhile.  The above estimates on social security survivors' benefits are fairly accurate, but max out for a larger family.  The "pot" is shared.

While I've managed pretty decently, a larger cash cushion would have been a huge relief during what was simply a horrible time.  I had to make decisions more hastily on where to live, going back to work, and even preschool and health care expenses that were different from the original plan we had for our family.

I now have a $500K term life policy on ME, with an up-to-date will and trust for my still-minor children.

[LiveLean]

Calimom -- Thanks for sharing your story. Even though we're talking life insurance, your story is a reminder about the importance of UM (uninsured motorist) insurance, something most people don't consider or even understand.

When you or an immediate family member is in an auto accident (or lose someone because of it) due to the fault of someone else, and that person has no assets and little or no auto insurance, your only hope is Uninsured Motorist coverage on your own auto policy. It should be $500K. You also can add UM protection of $1m on your umbrella liability policy. I was in an auto accident last year, hit by a deadbeat with no assets and minimal coverage. Were it not for UM, I'd be paying for all of my many medical bills out of pocket.