Author Topic: Life/Disability Insurance-- case study  (Read 2214 times)

kathryn1029

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Life/Disability Insurance-- case study
« on: March 03, 2016, 05:03:50 PM »
Which life/LTD insurance policy would you choose with the below income situation?

Me: currently in school and making close to nothing. Upon graduating in September, will make $60k. In 2019, will begin another degree, lasting 3 years, and again not make an income. After that degree, income will be ~$150k.

Husband: currently makes $80k, will increase to $150k in next two years and remain at that level or higher.

Other factors: plan to have 2-3 kids in the next 6 years, as well as purchase a home. We live in a mid-COL area, and plan to stay here or similar.

So, for husband (for now)... whole or term policy? Amount? Life or disability or both?

*Obviously these number are my best guess, but let's assume they're accurate for the purpose of this exercise*

lhamo

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Re: Life/Disability Insurance-- case study
« Reply #1 on: March 03, 2016, 05:27:10 PM »
Always term, never whole.

The real question is not what he makes, but rather what do you spend every month.  All the standard advice about "carry x times your income in life insurance"  is geared toward people who are spending every last cent they make.

At a minimum, you need enough life insurance to cover your annual living costs up until the point when you would be generating enough income to support yourself and any kids.  Remember to check his social security statement to see what benefits any minor children + you as their caretaker would get if he were to die.  This can be a surprisingly large amount, depending on his work record.  Similarly, you should have enough disability insurance to cover the family expenses up until the point you can become the primary breadwinner, should he become unable to work.

If you are rolling in cash, you can also choose to buy more insurance just in case -- it is a relatively inexpensive way to buy peace of mind and ensure that you are not forced to go back to work earlier than you are ready in the wake of a major tragedy.

Oh, and don't forget to get insurance on yourself if he is dependent on your income now, or if he would need to pay for services you plan to provide when you are in school.  You may be the lesser earning spouse, but your contribution is significant and would be sorely missed.  But check your SS benefits statement, too.

kathryn1029

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Re: Life/Disability Insurance-- case study
« Reply #2 on: March 03, 2016, 05:35:37 PM »
Good points.

I don't really know what we'll be spending when we have kids-- I'm sure I could attempt to figure it out, but am too lazy right now. I wonder if there is a standard multiplier?

I honestly had NO idea that there was a death benefit through social security. I've been reading MMM a long time, but have never seen it mentioned. He's only been in the workforce for 6 years, so it might not be much for him.

So, do most of you that have insurance have both life and disability? I agree that it seems pointless to have one without the other. Therefore, why does it seem that combined policies don't exist? A quick internet search turns up none.

I don't think we'll be at the point where it makes sense to have a policy on myself until after I get the second degree, so in about 6 years from now.

JoJo

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Re: Life/Disability Insurance-- case study
« Reply #3 on: March 03, 2016, 06:03:12 PM »
Is any Life or Disability provided by employer?

Term life is pretty cheap if you're young & healthy.

bearkat

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Re: Life/Disability Insurance-- case study
« Reply #4 on: March 04, 2016, 09:02:56 AM »
Quote
So, do most of you that have insurance have both life and disability? I agree that it seems pointless to have one without the other. Therefore, why does it seem that combined policies don't exist? A quick internet search turns up none.

Why do you see it as pointless to have one without the other?

That said, we have disability through my job (up to 40% of pay) and a small life insurance policy through my job (2x salary). We decided to add a small separate life insurance policy outside of my job so that if/when I leave, we won't be uncovered completely. If my next job doesn't have disability insurance, I would be unlikely to get a private policy, but maybe I'm just missing something.

tonycar17

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Re: Life/Disability Insurance-- case study
« Reply #5 on: March 04, 2016, 09:26:34 AM »
Carrying insurance is about transferring risk.  I can tell you what we do and why we do it and maybe that will help you to apply to your situation.

Me: income approximately $150K per year
Life Insurance:  $500K 20 year term policy that will be up in 2032.  By this time (and probably well before) we will be FI with little to no true need for life insurance.  When we get to FI, we will re-examine and determine if we keep it or not.  I also carry an additional $600K through work because it is so cheap to have.  Our only debt is our mortgage (about $200K), but we have 2 sons that I would want to have school provided for and then allow my wife to do whatever she wanted in terms of taking her time to get back into the workforce.
Disability Insurance: through work, premium paid with AFTER TAX DOLLARS (so that any payments should I become disabled would be TAX FREE).  This policy pays 60% of my salary, but because of my tax bracket and the fact that the payments would be tax free, this would be nearly my normal net pay should the policy need to be used.

DW: income approximately $110K per year.
Life Insurance:  $500K 20 year term up in 2032 - all commentary above for me applies to her as well.  She carries about $350K in additional coverage through work.
Disability Insurance: Same as what I have above on all counts.

As a previous poster said, do the disability through your employer if possible - it is almost always significantly cheaper than in the market.  ALWAYS make sure to pay the premium with AFTER TAX dollars so that your payment, should you need to use the insurance, is tax free (the premiums are generally very small too so the amount of tax deferral you lose by doing it after tax is generally pretty insignificant).  Your husband should have this now.

Life insurance in my mind is not only a strict financial calculation but a peace of mind thing that I want to make sure either my wife or I do not feel rushed to get back to work should the worst happen to one of us.  That is worth an extra $100 per month to me - others may disagree.  You both should have some sort of life insurance when you are earning an income - how much is about your personal peace of mind.

Not sure if this helps or not, but it is what we do and perhaps you can apply some of these things to your situation. 

TC

little_brown_dog

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Re: Life/Disability Insurance-- case study
« Reply #6 on: March 04, 2016, 10:07:10 AM »
We do disability insurance through my husband's employer. He also has his term life insurance through them (500k). As a sahm, we pay for a separate term policy for me (250k). Both policies are 30yr. Term is much cheaper than permanent, so it's definitely the way to go if you are just looking to replace lost income/support the family during the most resource intensive years. We plan on letting our term policies expire at the end without renewal given that we will be in our mid 50s and we expect/hope our children will be self sufficient (mid 20s) by then.
My husband's policy is obviously more generous since he is our only breadwinner and we would need to replace his income until I could resume working. My policy is generous enough to cover the costs associated with losing me, such as nanny/daycare, cleaning service, increased reliance on restaurants/takeout, and after school activities/care. We will probably increase the policies as we add more children to our family. My policy only costs us 20/mo. My husband's policy through work is extremely inexpensive.

lhamo

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Re: Life/Disability Insurance-- case study
« Reply #7 on: March 04, 2016, 01:49:52 PM »
The "standard multiplier" I have usually heard bandied about (Dave Ramsey uses it, for example), is 10x income.  But again, that is probably more suitable for people who are up to their eyeballs in debt and/or spending everything they make, not the typical mustachian who is probably saving anywhere from 25-75% of their income. 

And as for the reason life and disability are not combined, it is probably because insurance rates are based on actuarial calculations of what the risk of death/disability are.  Different rates for different events.  It is simplest for the insurance companies to offer separate products.  Same reason that you insure your automobiles separately from your home. 

And I believe the Social Security survivor benefits start kicking in after a very limited period of working, as long as you stay in the workforce -- it is very simple to set up an online account so that you can see what your projected benefit would be, start here:

https://ssa.gov/myaccount/