How much life insurance do you need?

[GuinnessPhish]

Anyone have any thoughts on this article?

http://www.clark.com/how-much-life-insurance-do-you-need

[Vic99]

Even before thinking about early retirement, I always thought that the "experts" would suggest waaay more money than I needed.  I got enough to pay off the house and have a four-five years of salary left over.  Got a 500k plan when my first child was born (I have two).  Wife did the same.

In retrospect, 250k was probably a good buy for me.

[AlwaysLearningToSave]

Most of this article is fairly reasonable.  Its a good approach to answering the question but oversimplifies the issue.  I have two main problems with it.  The first is this statement:

If you have a solid financial plan in place, you should probably buy $1,100,000 term insurance that would last until you retire.  In other words, if you are 45 today and plan on retiring at 65, a 20 year term policy might be the ticket – again, assuming your financial plan was strong.

Your need for life insurance decreases the longer you live and the more you save because your accumulated assets can provide for your beneficiaries and your beneficiaries need the assistance of insurance proceeds for a shorter period of time.  This hypothetical person WAY over bought life insurance because he has a full life insurance payout even if he dies a year before he retires-- when all the family should need is a small amount of money to get them through one more year before the "regular" retirement income strategy kicks in.

The other problem I have is that it fails to mention social security survivor's benefits.  This is a relatively little-known part of the social security program that has a big impact on your life insurance need calculations because it provides benefits for surviving children and your surviving spouse until the child reaches 16 years old.  See this link for more information on this:  https://www.ssa.gov/pubs/EN-05-10084.pdf  Of course, you should factor in at least some risk that this portion of social security will be modified/eliminated in the future. 

My family took a laddered approach to life insurance.  At age 27, I bought a term policy with the following payoffs (I am the primary breadwinner, with an employable wife and one daughter):
(1)  30-year, $250,000 term policy on my life.
(2)  20-year, $500,000 term policy on my life.
(3)  20-year, $300,000 term policy on DW's life.
It also has a rider for a small final expenses payout upon death of children. 

I think this is a reasonable way to cover all our needs.  If I die soon, but DW and DD survive, they get $750,000.  This plus Social Security survivor benefits will leave them well cared for.  If wife dies but DD and I survive, I get $300,000 plus social security benefits, which would essentially take pressure off of me and allow me to be more flexible for my daughter but I'd likely continue working.  If both of us die, DD gets 1.05 million, plus social security benefits.  If I die between 20 and 30 years after we purchase the policy, DD will be out of the house and DW gets a small amount to make any necessary lifestyle changes. 

Part of me thinks I overbought but I'd rather miss high than low. 

[Proud Foot]

I thought that article was good and had a lot more reasoning and explanation behind it than the typical 10 times salary advice that is usually given.  I feel like the 10x salary was good advice 50 years ago when the men worked and their wives stayed home.  It doesn't apply as often now as more families are dual income.

[Altons Bobs]

We never bought Life Insurance. Our reasoning is this, when we were young, either one of our income would be more than enough to cover daily expenses if one of us died. We were FI'd before we had a baby, and at that time, we had enough to self insure, so we never bought any.

[Frugal D]

Do you have life insurance, Phil? Because if you do, you could always use a little more, right? I mean, who couldn't? I got the feeling ... you ain't got any. Am I right or am I right? Or am I right? Am I right?

[wenchsenior]

We based our calculation on how close we were to our target FI amount, and then took out policies that roughly would cover the difference. It turned out that both of us took out the same amount for different reasons. 500K on DH (the primary earner) would leave me financially independent. 500K on me would leave a couple hundred grand for him to continue supplementing our mothers' care (which my earnings cover now) and get him within only an additional year or two of work to reach FI.

We set 15 year policies, assuming that the dangerous window is the next 10 years, and after that we would hopefully have plenty in the stash to make up the difference.

[Paul der Krake]

At the risk of sounding like a broken record, everyone who is thinking of buying life insurance to protect their family should really, really sign up on ssa.gov and see the estimated survivor benefits before purchasing anything in the private market.

If Joe Average who earns $60k/year croaks while young and leaves a spouse and one young child behind, the surviving family will be getting about $3,400/month of de facto tax free income until the kid's 19th birthday.

It's so generous that you start wondering why moral hazard doesn't kick in.

[FINate]

The article is actually pretty good - cover expenses rather than arbitrarily replacing income.

We bought term life years ago when we were planning for kids but were not yet FI. I viewed it as a bridge to FI should I, the primary breadwinner, die unexpectedly. Basically, cover our few debts and then provide enough capital to live modestly on the passive income. Primary goal was to cover the period when we have dependant children, so a 20 year policy. We still have the policy even though we don't really need it just because it's so inexpensive. No plans to purchase another or extend the existing policy in the future.

[nora]

Do you have life insurance, Phil? Because if you do, you could always use a little more, right? I mean, who couldn't? I got the feeling ... you ain't got any. Am I right or am I right? Or am I right? Am I right?

Lol. Is that Groundhog Day?

I am in Australia, no social security benefits here as far as I know. I have way too much life insurance, based on an earlier time when I thought we needed more to FIRE. And we had a big mortgage 700000, student debt 100000, no wealth. I will keep it for another couple of years but once FIREd will cancel it. It is for death 2400000, trauma/disability 800000 each. My partner has a small death policy of around 150000 but as of today he has REd! Will cancel his when I RE too. So am a little jealous and looking forward to joining him soon.

[Playing with Fire UK]

I get 10x annual salary through my work. I reduce that to 6x via our flexible options package (and get back the difference in premium), but can't reduce further.

Honestly, it feels like too much. Our house is paid off, no kids. House + 'stache + 6x salary would be enough for SO to never work again and have some fancy healthcare (I'm figuring that the case I need to plan for is that I die in the same accident SO is horribly injured in). [I'm lucky that I'm based in the UK so private healthcare is much more affordable and there is more of a safety net compared to the US and other places.]

I don't WANT to be worth any more than that dead! I definitely don't want the extended family finding out how much SO and I would be worth dead.

Life insurance seems to be sold on the basis that it would be bad if a loved one dies (not contended) and that money would make that better. Now there are some problems that money can fix (paying mortgage, paying bills), but it can't bring a loved one back, and could actually cause more hassle for the survivors.

[redbird]

From the perspective of a FIRE'd person:

We don't have any. Our stash is intended for 2 adults to more than live for the rest of our lives. If one of us dies - yes, that will be hard from a loss of someone you love perspective. But from a financial perspective, the other person is more than covered since the money is intended for 2.

Before FIRE - I did have life insurance through my job for several years in my early 20's. I can't remember what the coverage was. I had it just because the HR people told me I "needed" it without really understanding anything about it. I ended up cancelling it when I realized we weren't planning to have kids ever, and husband (even before we thought about FIRE) could more than take care of himself financially through his own pay if I were to die. Life insurance is for survivors, so if you don't have anyone that will survive you that will need it, then it's a waste of money.

[Schaefer Light]

We never bought Life Insurance. Our reasoning is this, when we were young, either one of our income would be more than enough to cover daily expenses if one of us died. We were FI'd before we had a baby, and at that time, we had enough to self insure, so we never bought any.

That's my thinking as well.  Plus, why would I want to spend money on something I'll never benefit from? ;)