Author Topic: Life Insurance  (Read 2131 times)

jennymouse

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Life Insurance
« on: March 02, 2016, 01:49:35 PM »
Hello, I'm a new reader and so delighted to come across such great advice on this blog.  I'm in awe of all of you!   

My question is about life insurance.  We pay $250 a month for four policies: two term and two permanent policies.  I am almost convinced that we should cancel them and put the money toward our mortgage instead.  I thought that by reducing our living expenses, both of us would be OK in the unlikely event that the other one passes away.  If something happened to us both, though, we would have nothing to go to the kids or to their new caregivers, except the equity in our house.  We are currently set to pay our mortgage off around the time we retire in about 15 years at age 55.

I would love to hear your thoughts!  Thanks so much.

slugsworth

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Re: Life Insurance
« Reply #1 on: March 02, 2016, 02:02:16 PM »
Regarding term, would your children's new caregivers be able to afford the expense of the kids without the assistance?

Regarding the permanent insurance policies, I think the age of them makes a big difference on your course of action - but most likely feeding them doesn't make sense. Converting to paid in full may make sense if they are older policies.

Do you have any coverage through work?

Regarding putting extra funds toward your mortgage, there may be a better alternative investment (e.g. your retirement accounts) but you would need to do a case study to for people to give you more input.

little_brown_dog

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Re: Life Insurance
« Reply #2 on: March 02, 2016, 02:41:43 PM »
My first instinct would be to get rid of the permanent policies and keep the term considering those should be alot cheaper. But then again I don't know your circumstances.
I have a 30yr term policy for 20/mo. Since my substantial term policy will run out when I'm in my late 50s and my children should be grown, flown, and in their mid 20s by then, we don't think it is necessary to hold a permanent policy on me. My husband has a term policy through work, and a permanent policy that his parents took out for him when he was a kid. As a result the rate is low, so we find it worthwhile to keep it until we no longer have to pay into it anymore. Overall, for the 3 policies we probably pay about $100/mo. If we just had the term policies, it would be $30.

jennymouse

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Re: Life Insurance
« Reply #3 on: March 02, 2016, 03:28:33 PM »
Thank you for the replies.  My husband and I are both 40 year old teachers, two kids ages 10 and 8, and we live in Canada (Ontario).  We plan to retire about the age of 55, and our mortgage is currently set to be paid off just about that same time.  We have had our policies since 2011.  We each have $100,000 in Permanent Coverage and 1 million in Term 20.  My monthly premiums are $45 (term) and $45 (permanent), and my husband's premiums are $95 (term) and $63 (permanent).  His higher premiums are due to a more complicated health history.  We are both non-smokers.  We have at least 400,000 in equity on our house.  We don't have any other life insurance, ie from work. 

What does paid in full mean in terms of life insurance?  Do all policies have that option?

Thanks

merula

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Re: Life Insurance
« Reply #4 on: March 03, 2016, 08:42:56 AM »
The point of life insurance is to replace income in case of death. $1.1m seems like way more than you would need to replace both of your incomes until your children are grown.

I would try to figure out what you would want to pay for if you and your husband both died, and work backwards from there. Let's say, hypothetically, you'd want to pay off your house, have your children live there through college, pay for their college, and then let them sell the house to have some money to start out in life. So, in that case, your total assets including life insurance would be the amount that's left on the loan + living expenses x 14 years + college expenses x2. If you're planning to retire in 15 years, it seems likely that you're most of the way there even without the life insurance.

Also, are there any government benefits for orphans in Canada? In the US, children are able to draw on their deceased parent's social security until they're 18, and surviving spouses caring for minor children also get a benefit.

For me personally, the life insurance I carry is enough to pay for funeral costs and pay off the mortgage, with some wiggle room for likely end-of-life medical expenses. It's actually not all that much. Then my children or husband and children would be able to live off of social security while leaving our savings to grow over time. Savings would pay for my kids' college, and for my husband's living expenses between when the youngest turns 18 and when he could start collecting social security again.

bearkat

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Re: Life Insurance
« Reply #5 on: March 04, 2016, 09:28:34 AM »
I agree that it's worth listing out what and how much the money in your policies will be used for. $2.2MM may be a lot to last 2 kids for ~12 years, but you may have other desires for that money (ie charity?).

Are either of your kids special needs or will they a life long caretaker? If not, (and maybe even if yes), I would cancel the permanent policies. You've got 15 years left on term 20, at which point your youngest will be 25. And by that point, having  been raised by two mustachian teachers, I'm sure he/she will be more than capable to take on the world. (I'm assuming that you're done having kids.)

Quote
What does paid in full mean in terms of life insurance?  Do all policies have that option?

In simple terms, paid in full for permanent life insurance means that you  stop paying premiums and you only receive the amount of life insurance that your previous premiums can support (for you after 5 years, something way less than $100k). Ask your life insurance salesman (advisor) for your in-force illustration and the paid-in-full amount should be on there. (note: there are so many brands of life insurance that yours may or may not place restrictions on stopping premiums or converting to paid in full.)

For more insights on permanent life insurance from this community, you can read my experience with it from this thread:
http://forum.mrmoneymustache.com/ask-a-mustachian/so-my-mother-in-law-sold-us-a-northwestern-mutual-whole-life-policy-now-what/

Goldielocks

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Re: Life Insurance
« Reply #6 on: March 04, 2016, 03:48:20 PM »
The approach I would use:

1)  Figure out the needs for insurance util kids are out of your home (about age 23 for most people) -- a "rule of thumb" might be 50% x take home pay, if you need both incomes to make ends meet...   or 10 years x $expenses/yr...

I would be surprised if you really need a full $1.1 Million in insurance (That is $80k/yr, on top of one spouse working!!!), especially as both of you are employed / employable right now, and as MMM's you likely have quite a bit of assets to offset this need. 

2) Figure out insurance needs after kids are on their own --when you are 55 --  e.g., to pay capital gains taxes on property outside RRSPs, or to pay off taxes on  the Cottage if not dual ownership, etc.

3)  Subtract your current net worth that offsets the insurance need --

Are you self funded?

If not, then you need insurance.  How?

Term -- covers you until kids are gone.  Great for the bulk of your needs.  Low Cost.  Look for group term insurance for the lowest rates and insurance that does not end when/if you leave your job.   

 Term gets expensive after you are 45 years old, though, so you will likely want to reduce the amount every 5 years going forward to only what you really need, as you build other assets to self-fund your needs.

Permanent -- Useful for coverage to end of life, for a smaller amount..to pay off taxes or reduce mortgage.  Also great for your husband as he will never have to worry about requalifying, which typically just becomes harder and harder to do at good rates.   However, this should be the amount you anticipate needing after your kids are gone. So $100k may be about right.  By essentially pre-paying for it over many years, starting now, you dont' have the super high fees that come once you hit 60 years old. 

Permanent insurance also is nice, as you can borrow from the paid up portion of it, if needed, once it grows.  (with interest though, but good for emergency risk offsets).   This is not a reason to get it, but just know that it is not off limits until you die.  Permanent Insurance doesn't make sense, though, if you don't think you will need insurance after you are 55 years old. 

« Last Edit: March 04, 2016, 03:56:36 PM by goldielocks »