Author Topic: Life insurance questions  (Read 3036 times)

moonpalace

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Life insurance questions
« on: June 23, 2017, 07:41:40 AM »
I'm 41, DW is 39, kids are 8 and 12. Everyone in great health (knock on wood).

I currently have two years of income replacement through work and nothing else.

Mortgage balance is $275,000, house is worth $319,000
Investments + cash total right around $110k
Student loan balance is $63k
DW is self-employed at home, gross income ~$90-95k. She provides after-school and lots of summer care for our kids.
I work full-time in an office, gross income $80k plus benefits.
Not sure how much it matters, but DW will likely inherit a substantial amount from her parents and I won't.

Since we both work, I assume we both need coverage. How much is reasonable? I was thinking at last $500k each, but wondering if it makes sense to get more on her because of the inheritance thing. Plus coverage for her is way cheaper than it is for me.

Has anyone used Costco for this? Other recommended providers?

Thanks!
mp

jamesbond007

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Re: Life insurance questions
« Reply #1 on: June 23, 2017, 07:52:42 AM »
posting to follow.

Gin1984

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Re: Life insurance questions
« Reply #2 on: June 23, 2017, 07:55:31 AM »
You missed a key question, what are your annual expenses? 

catccc

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Re: Life insurance questions
« Reply #3 on: June 23, 2017, 08:15:48 AM »
I think what you need to think about when you consider life insurance amounts is what actual expenses would need to be covered should one or both of you pass.  What do you guys currently spend?  Would there be additional expenses or a drop in others if one or both of you passed?  What do you want the insurance to cover?  For example, would one of your incomes be enough to maintain your current standard of living and savings goals if, say, the mortgage was paid off, should one of you pass?  What if you both did?  What would your kids' guardian(s) need to raise your kids?

I don't think the inheritance should be considered in this, because it isn't a sure thing.



moonpalace

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Re: Life insurance questions
« Reply #4 on: June 23, 2017, 08:19:43 AM »
You missed a key question, what are your annual expenses?

LOL. Right!

Current annual expenses are $79k or so.

Annual expenses without mortgage and student loans are $33.5k.

Thanks!

catccc

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Re: Life insurance questions
« Reply #5 on: June 23, 2017, 08:23:28 AM »
btw, I used some random outfit I found online called matrix direct to purchase our AIG term life insurance.  I would have used costco if I wasn't freaking out about immediately needing coverage.  It was a week after we had our first baby when I realized that DH and I were responsible for her well being even if we weren't around.  So we got it in a hurry.  DH has $400K of coverage and I have $500K, for $348 and $319 respectively.  Terms close to 30 years, but they backdated the policy a bit to lower my premium (essentially starting the plan at a younger age that I'd already passed), so mine is more like 29 years and some months...

Anyway, generally a costco fan.

moonpalace

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Re: Life insurance questions
« Reply #6 on: June 23, 2017, 08:33:13 AM »
What do you guys currently spend? 
$79k, but a ton of it is paying debts/mortgage. Without that stuff it's $33.5k.

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Would there be additional expenses or a drop in others if one or both of you passed? 
If she passed, there would be increased child-care expenses. If I passed, probably some of that as well. I suppose a general drop in expenses if either one of us passed because there'd be one less mouth to feed, less clothes to buy, less discretionary spending, etc. Probably roughly a wash?

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What do you want the insurance to cover?  For example, would one of your incomes be enough to maintain your current standard of living and savings goals if, say, the mortgage was paid off, should one of you pass?  What if you both did?  What would your kids' guardian(s) need to raise your kids?
I would want it to pay off our house and other debts. So that's $338k right now, and dropping by about $2k/month. If all of that was paid off, then either of our incomes would be enough to maintain everything else.

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I don't think the inheritance should be considered in this, because it isn't a sure thing.
I'm not considering it in our other retirement planning, but here I'm considering it only in potentially increasing coverage on her, not decreasing it on me. Am I wrong to think that that is a meaningful difference? As I write it out I realize that maybe it's just a post hoc justification...

Gin1984

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Re: Life insurance questions
« Reply #7 on: June 23, 2017, 08:40:42 AM »
When will you be done paying off your student loans? Same question for mortgage?

lhamo

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Re: Life insurance questions
« Reply #8 on: June 23, 2017, 10:07:02 AM »
Be sure to consider what your SS survivor benefits would be for kids/surviving spouse when determining coverage needs.   Lots of people overinsure because they don't know how SS survivor benefits work -- basically kids get a benefit through age 18 or date of high school graduation, and surviving parent also gets a benefit through kids 16th birthday.   

Proud Foot

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Re: Life insurance questions
« Reply #9 on: June 23, 2017, 10:50:44 AM »
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I don't think the inheritance should be considered in this, because it isn't a sure thing.
I'm not considering it in our other retirement planning, but here I'm considering it only in potentially increasing coverage on her, not decreasing it on me. Am I wrong to think that that is a meaningful difference? As I write it out I realize that maybe it's just a post hoc justification...

Still not a sure thing that she would receive any. Too many variables there to determine whether there will be any inheritance or not. I personally don't count any potential inheritance in any of my calculations.

moonpalace

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Re: Life insurance questions
« Reply #10 on: June 23, 2017, 11:02:04 AM »
When will you be done paying off your student loans? Same question for mortgage?

Student loans, 2024 at the latest.
Mortgage, 2032 and no sooner (it's at 2.75%)

moonpalace

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Re: Life insurance questions
« Reply #11 on: June 23, 2017, 11:13:29 AM »
Be sure to consider what your SS survivor benefits would be for kids/surviving spouse when determining coverage needs.   Lots of people overinsure because they don't know how SS survivor benefits work -- basically kids get a benefit through age 18 or date of high school graduation, and surviving parent also gets a benefit through kids 16th birthday.

Very good point! My current monthly survivor benefit is $1,362 per kid under 18, and $1,362 for DW as long as at least one kid is under 16.

Her amount is $942/month but she's only recently started working full-time so that will go up.

moonpalace

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Re: Life insurance questions
« Reply #12 on: June 23, 2017, 11:18:37 AM »
10 year term would be good for you.

Why 10 year? Would love to understand this better. I was assuming that locking in for 20 would be better.

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I think 400k for her and about 300k on you.  Your expenses are low, so knock out the debt and one income will be get by just fine.  You probably want a little more on her as she's taking care of the kids and you'd have to outsource that.
Thanks for the numbers! Those are a bit lower than I was thinking, but in the ballpark. I'll look at what premiums are on those amounts.

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You could consider none on yourself, since your wife's family is loaded.  You could rely on that and save some money if you're sure her family would help her out.  Why not be pseudo self insured?
I'm sure they would help her out some, but not comfortable doing $0 on me. They're already supporting one of her siblings, who has serious lifelong challenges, 100%. The cost of $300k (or even $500k) on me is not gonna be much, and I'll sleep better at night knowing it's in place and we're paying for it and not imposing that risk on them.

moonpalace

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Re: Life insurance questions
« Reply #13 on: June 23, 2017, 01:53:29 PM »
In 10 years your kids will be adults.  Looking at your current numbers, expenses and considering your debt will go away eventually, you'll probably be in an even better financial position in 10 years.  You probably won't need any life insurance in 10 years, or much less anyways.

The insurance industry should sell a declining value product that is less costly and reduces the benefit each year.

In the end it's a good investment if it makes you sleep better at night for sure.  There's a lot of personal preference here, even if you want 15 year (or 20), it shouldn't be a big difference.

That makes sense. The Costco product actually does have a declining benefit after the stated period, albeit at the same premium. The decline in benefit seems to be pretty dramatic, with the example being a reduction of over 60% in year 21. It's pretty clear that any sane person would cancel pretty soon after the stated period!

I think you're right that we won't really need a ton of life insurance 10 years from now. Planning to FIRE in ~14 or 15. So even if I got the 20-year we'd probably cancel early anyway. And the premiums for the 10-year are dramatically lower than for the 20 (about 40%).
« Last Edit: June 23, 2017, 02:12:19 PM by moonpalace »

calimom

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Re: Life insurance questions
« Reply #14 on: June 23, 2017, 04:58:44 PM »
A helpful tool in your planning/decision making would be to look up your accounts on ssa.org. If you or your wife should die while you still have minor children, they will receive survivors' benefits. Neither of you would be eligible till age 60, but it's worth a look. My husband died when my kids were small (youngest was 14 months) and these benefits have been fairly generous and helped a great deal with raising my family. I still wish we'd had more life insurance though - especially planning for college, etc. SS benefits end at 18, or 19 if the beneficiary is still in high school.

moonpalace

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Re: Life insurance questions
« Reply #15 on: June 23, 2017, 05:42:06 PM »
A helpful tool in your planning/decision making would be to look up your accounts on ssa.org. If you or your wife should die while you still have minor children, they will receive survivors' benefits. Neither of you would be eligible till age 60, but it's worth a look. My husband died when my kids were small (youngest was 14 months) and these benefits have been fairly generous and helped a great deal with raising my family. I still wish we'd had more life insurance though - especially planning for college, etc. SS benefits end at 18, or 19 if the beneficiary is still in high school.

Thanks for this reminder! Someone else mentioned it as well. We did this and those bennies are quite good! Definitely makes me feel better about not going hog-wild on insurance amounts. I benefited from SS survivors benefits myself; mom died when I was 16.

Beach_Stache

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Re: Life insurance questions
« Reply #16 on: June 24, 2017, 06:06:25 AM »
I would really think about how long you would need insurance.  Your kids are a bit older, if you don't plan on having anymore, if you kicked the bucket today then they would need help for what, maybe 10 years?  You have a mortgage and expenses but what would your family do if you went, would she move in with her family, or want to stay in the same place?  Would she get a job or want to just stay at home and tend to the kids?  If they are of school age is there any reason that she couldn't continue to work?  I think you said that you get 2 times/salary for your normal office job, right?  Is that not enough to float them for a year or so?

Insurance is all a big scam, they scare you into thinking you need it for life, when you really only need it when you're in your lowest point in terms of debt and earning power.  I have 3 kids, and we each have life insurance through work, just the basic stuff.  The kids are 8, 6, 3 and now only 1 is in daycare.  We put lots of money into 401k/Roth/post-tax so we are doing well.  I got the x7 insurance for my work and DW has x3, but that is because we can cancel it at any time and I really only wanted it for like 3 years.  In another 3 years we won't need it because we'll have a decent amount in investments, kids will all be in school so no daycare payments and my wife has family in the area.  So really think about the actual situation and where money will come from, if they will move in with her family if they are in the area, and if your DW will work.

Many people get these $1M insurance policies because they want the house paid off, their spouse never to have to work again and their kids never to have to work, but is that the reality you want for your family?  I personally want to have them covered enough so in that few year transition period they don't have to sell the house, sell themselves or live on the streets.  If you get an additional insurance policy I wouldn't get locked in for more than 10 years, as at that point they'll have jobs or be in college and can take student loans, or in all honest, if their dad kicks the bucket they will have a great scholarship essay and will probably get money for college. 

It's a normal thing to worry about your family, but that's what the industry wants us to believe, that if we don't buy life insurance that we hate our kids and family.  Try not to get caught up in the hype and really think about expenses after you kick the bucket.

Polaria

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Re: Life insurance questions
« Reply #17 on: June 25, 2017, 01:09:22 AM »
How much is reasonable? I was thinking at last $500k each, but wondering if it makes sense to get more on her because of the inheritance thing. Plus coverage for her is way cheaper than it is for me.

To determine what amount is reasonable, I'd say you have to run a "simulation" to determine the consequences of 3 scenarios:
- your passing
- your wifes's passing
- you both passing.

If you have a financial shortfall between income and expenses in those simulations then insurance may be worthwhile to cover it , if not insurance wouldn't be necessary.
These simulations may also allow you to identify if you have other things to set up, for example who is going to take care of your children if you both pass away.

moonpalace

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Re: Life insurance questions
« Reply #18 on: June 25, 2017, 05:45:15 AM »
To determine what amount is reasonable, I'd say you have to run a "simulation" to determine the consequences of 3 scenarios:
- your passing
- your wifes's passing
- you both passing.
We more or less did this yesterday. At least for the first two scenarios. Great advice! And a surprisingly hard thing to fully think through.

As others have pointed out, there's a period of years at the beginning here, where the social security payments to the surviving spouse would be substantial, and easily enough to take care of monthly expenses even if those increased a bit. I also have 2 years of income replacement through work. But I'm the one whose job currently provides health insurance. And she's the one who currently provides a lot of child care for our kids (she works at home as a daycare provider).

Our priority, though, was not merely to make sure that the survivor could get by. Rather, we wanted to make sure that there is enough coverage that financial issues are no longer a concern for the survivor, who will have more than enough to be concerned about on other fronts. So the survivor needs to be able to pay off our house ($277k) and student loans ($63k) and have some left over to not work for a while, deal with inevitably increased expenses in the aftermath of a tragic event, and not worry about the money.

So we decided on 20 years, 500k. Monthly combined premium is only $54 and we can cancel or adjust the amount anytime. So if, ten years from now, that amount is excessive, we can either cancel entirely or decrease the benefit. Early cancellation is likely, but we also like the security of locking in the benefit and premium for long enough to get both kids out of the house and into early adulthood.

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These simulations may also allow you to identify if you have other things to set up, for example who is going to take care of your children if you both pass away.

Eek! Yes. This is very important and we haven't taken care of it sufficiently.

Thanks, Polaria!

Polaria

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Re: Life insurance questions
« Reply #19 on: June 25, 2017, 06:29:49 AM »
Insurance is all a big scam.

I am an actuary and I worked in a life insurance company for 4 years. I don't know what are the regulations where you live, but in Belgium there is a legal obligation to ensure that the insurance products you are selling to a policyholder fit their needs (which is basically doing what I have said in my previous comment about running scenarios and determining the financial shortfall). Of course it's best that you do your homework beforehand to define your needs and what you want out of the insurance product.

It's a normal thing to worry about your family, but that's what the industry wants us to believe, that if we don't buy life insurance that we hate our kids and family. 

I think it's always wise to at least consider the option of buying life insurance, then run the scenarios and see if buying life insurance would be worthwhile.

lhamo

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Re: Life insurance questions
« Reply #20 on: June 25, 2017, 12:11:20 PM »
Are your student loans each in your individual named, not joint? If so then they may be zeroed out at death. Check with your loan provider.