Author Topic: Life Insurance and Early Retirement  (Read 4668 times)

Gen Y Finance Journey

  • Stubble
  • **
  • Posts: 209
  • Location: CA
Life Insurance and Early Retirement
« on: April 29, 2014, 10:06:12 AM »
I was up late last night pondering about how much life insurance one should get if one is planning to FIRE soon. The purpose of life insurance is to replace your income should you pass away during your earning years, so presumably everyone here would agree that if you're already financially independent, you don't need life insurance. But do you need it if you're well on your way to financial independence, but not quite there yet? And if so, how much do you need? Here is a hypothetical situation:

  • DH and I have decided that our FIRE number is $850k + paid off house
  • We wait until our net worth is $500k (not including house) before we have a child, at which point we consider life insurance
  • We project that we will reach FIRE in 10 years after that
  • No debt other than a $150k mortgage

Given these parameters, I figure there are two reasonable options:

  • Forgo life insurance entirely, assuming that if one of us dies, we have a big enough safety buffer. The living spouse will have to work a bit longer, but it wouldn't be a financial emergency.
  • Buy a 10 year term life insurance policy. But how big should it be? The likelihood that one of us will die tomorrow is very small, so $500k to pay off the house and hit the FIRE number seems excessive. What is the right number?

Which of those options do you think is best? Are there other factors I'm not considering? Any compelling reasons to buy a longer/bigger policy? Is the cost differential small enough that you may as well err on the side of over-insuring?

kevinb421

  • Stubble
  • **
  • Posts: 106
Re: Life Insurance and Early Retirement
« Reply #1 on: April 29, 2014, 10:24:28 AM »
I have 300k in life insurance on both my wife and myself.
This is to pay off the mortgages on our residence and rental property plus have money left over. It is so cheap that it is worth it. we pay just over $200 a year for both policies.

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Life Insurance and Early Retirement
« Reply #2 on: April 29, 2014, 10:36:54 AM »
Before kids you would really only need life insurance to cover the lost income of one spouse to reach your original FI goals.

Some things to consider after you have kids, you might need day time childcare if the surviving spouse needs to work.  Also your expenses will more than likely increase until the child goes to school, and even then they may need after school care.

Consider getting life-insurance sooner rather than later if you are a few years from having a child your premiums will be cheaper.

I would seriously recommend term-life insurance if you plan on having a child, but you may not need as much as you think as you would get SS survivor benefits. 

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1037
  • Location: Seattle, WA
Re: Life Insurance and Early Retirement
« Reply #3 on: April 29, 2014, 10:56:00 AM »
If you're well on the way to FI you should be able to make it at least a year or two by spending down some savings, essentially that's self-insuring at no premium.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4844
  • Age: 34
  • Location: Seattle, WA
Re: Life Insurance and Early Retirement
« Reply #4 on: April 29, 2014, 11:23:08 AM »
Before you have kids, I see little need to buy life insurance if both spouses already work and earn enough to support a frugal lifestyle for one person.

After you have kids, things change a bit. Single parenting with a full-time job seems like an extremely difficult thing to do, difficult enough that you may decide it's worth buying enough life insurance so that you never have to do it. To determine how much is "enough," take the following into account:
1) Your assets,
2) Any life insurance your employer already buys for you, and
3) Social Security survivor's benefits (or any equivalent foreign program that may apply to you).

The Social Security piece is a big one that I think many people overlook when buying life insurance. In my case, if I died tomorrow, each hypothetical child of mine would get about $20k/year until graduating high school, and my wife would receive the same amount until the youngest hypothetical child turned 16. These benefits are subject to a family maximum of about $45k/year, and the spousal benefit would be phased out if she continued to work and her earnings were above a certain limit. Everyone's benefit amount is different based on their work history, so you should check online for the numbers that would apply to you.

In our case, these benefits are large enough that they should be able to completely cover reasonable living expenses until the kids are grown. A true Mustachian would find a way to invest some of this money for a college fund and/or retirement. In addition, any previously owned assets, combined with any life insurance payout, would be able to compound during the time the benefits are being paid out.

I would say it's entirely possible that if you plan to have $500k plus a paid-off house when you have your first child, that plus the Social Security survivor's benefits could be enough to ensure a comfortable childhood for any children plus a comfortable retirement for the surviving spouse if one of you were to pass away.

Gen Y Finance Journey

  • Stubble
  • **
  • Posts: 209
  • Location: CA
Re: Life Insurance and Early Retirement
« Reply #5 on: April 29, 2014, 11:40:47 AM »
Based on the responses so far, it seems like there isn't really a "right" answer. If you have enough assets and you factor in employer life insurance + SS survivor benefits, you technically shouldn't need life insurance, but it provides peace of mind and would certainly make your life easier should your spouse pass away - a situation I'm sure most of us really don't know how we would react to.

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Life Insurance and Early Retirement
« Reply #6 on: April 29, 2014, 11:42:02 AM »
Regarding social security survivor benefits, the surviving spouse can only collect starting at the age of 60 if they are not disabled.

http://www.ssa.gov/survivorplan/ifyou5.htm

Gen Y Finance Journey

  • Stubble
  • **
  • Posts: 209
  • Location: CA
Re: Life Insurance and Early Retirement
« Reply #7 on: April 29, 2014, 11:49:13 AM »
Regarding social security survivor benefits, the surviving spouse can only collect starting at the age of 60 if they are not disabled.

http://www.ssa.gov/survivorplan/ifyou5.htm

Or if they're caring for a child under 16. Plus the child gets a benefit too up to age 18.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4844
  • Age: 34
  • Location: Seattle, WA
Re: Life Insurance and Early Retirement
« Reply #8 on: April 29, 2014, 11:53:01 AM »
Regarding social security survivor benefits, the surviving spouse can only collect starting at the age of 60 if they are not disabled.

http://www.ssa.gov/survivorplan/ifyou5.htm

Your surviving spouse can also collect benefits if he/she is taking care of your children under 16 and has not remarried.

Source: the last bullet point on this page. This other page mentions that the widow/widower who is caring for your child will receive 75% of your "basic benefit amount" -- the same as each kid would receive.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Life Insurance and Early Retirement
« Reply #9 on: April 29, 2014, 12:14:33 PM »
If you wait until $500K NW to have kids and go without life insurance until then, the only thing life insurance would provide at that point is protection for your FIRE plans for the surviving spouse.

A (mustachian) single parent with a nest egg of $500K should be able to get by with no financial problems for a very long period if time. That is more than enough to fund a few years of no work, plus many years of childcare or other child raising costs so you can go back to work and keep the NW relatively stable.

I vote no insurance. We have it right now, but we have 2 kids and our net worth is not that high. I will drop the $300K coverage on my wife once we reach about $500K NW, and I will drop the $500K coverage I pay for on me once we get to $700K-$1M NW. I think she would need a lot more security than me due to our current earning potential.

Nords

  • Magnum Stache
  • ******
  • Posts: 3188
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Life Insurance and Early Retirement
« Reply #10 on: April 29, 2014, 12:27:01 PM »
Given these parameters, I figure there are two reasonable options:
  • Forgo life insurance entirely, assuming that if one of us dies, we have a big enough safety buffer. The living spouse will have to work a bit longer, but it wouldn't be a financial emergency.
  • Buy a 10 year term life insurance policy. But how big should it be? The likelihood that one of us will die tomorrow is very small, so $500k to pay off the house and hit the FIRE number seems excessive. What is the right number?
Which of those options do you think is best? Are there other factors I'm not considering? Any compelling reasons to buy a longer/bigger policy? Is the cost differential small enough that you may as well err on the side of over-insuring?
The options sound reasonable.  Maybe now you're in between the choices of spending the money and gaining peace of mind. 

How much would you pay per month for a cheap term policy, and will the cost significantly delay your financial independence?  If neither of those is a big factor then you could go ahead and buy the peace of mind.

I also agree that after you reach FI there's no need for life insurance.  The only reason after that point would be for an estate-planning tool.

Gen Y Finance Journey

  • Stubble
  • **
  • Posts: 209
  • Location: CA
Re: Life Insurance and Early Retirement
« Reply #11 on: April 29, 2014, 12:49:57 PM »
Given these parameters, I figure there are two reasonable options:
  • Forgo life insurance entirely, assuming that if one of us dies, we have a big enough safety buffer. The living spouse will have to work a bit longer, but it wouldn't be a financial emergency.
  • Buy a 10 year term life insurance policy. But how big should it be? The likelihood that one of us will die tomorrow is very small, so $500k to pay off the house and hit the FIRE number seems excessive. What is the right number?
Which of those options do you think is best? Are there other factors I'm not considering? Any compelling reasons to buy a longer/bigger policy? Is the cost differential small enough that you may as well err on the side of over-insuring?
The options sound reasonable.  Maybe now you're in between the choices of spending the money and gaining peace of mind. 

How much would you pay per month for a cheap term policy, and will the cost significantly delay your financial independence?  If neither of those is a big factor then you could go ahead and buy the peace of mind.

I also agree that after you reach FI there's no need for life insurance.  The only reason after that point would be for an estate-planning tool.

I haven't actually looked at any policies or gotten quotes, this was purely a hypothetical question on the philosophy of ER and life insurance. We're still several years away from starting a family, but my brother is expecting his first child and shopping for life insurance policies, so it's been on my mind lately.

Nords

  • Magnum Stache
  • ******
  • Posts: 3188
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Life Insurance and Early Retirement
« Reply #12 on: April 29, 2014, 08:56:29 PM »
I haven't actually looked at any policies or gotten quotes, this was purely a hypothetical question on the philosophy of ER and life insurance. We're still several years away from starting a family, but my brother is expecting his first child and shopping for life insurance policies, so it's been on my mind lately.
Try USAA and LifeInsuranceByJeff.com.  Lots of education, no sales pressure.  I've spent time with Jeff; he's a CFP and a good guy.  But now that I look at your poster name, you probably already know that.
« Last Edit: April 29, 2014, 08:58:33 PM by Nords »