Author Topic: SAHP, Social Security, and Life Insurance and taxes  (Read 2319 times)

ender

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SAHP, Social Security, and Life Insurance and taxes
« on: April 25, 2015, 03:44:06 PM »
DW and I are recently married in our late 20s with no debt, around $150k in retirement accounts, both healthy and hoping to have a family (2-6 kids? not 100% sure right now) at some point. I will be the primary earner in future (currently make $80k-ish a year) - DW will almost assuredly become SAHM if/when we have children.

We're trying to figure out how much term life insurance we should get. Social Security makes this far more complex than I would like because it is a very similar effect to life insurance.

When I look at my Social Security estimates, it shows currently that I have qualified for $1,725 for primary caregiving parent, and $1,725/child. Max family benefit of $4026/month. So in the following scenarios, where I die (Scenario A), she will receive:

  • 1 child - $3,450/month
  • 2+ children - $4,026/month
That's a large amount of money relative to our spending currently and reduces our need for life insurance somewhat significantly. Most companies (my current one included) have some life insurance ($150k, 3x salary, etc) as a benefit. Should something happen to me, unless we have a ton of children my wife should be in pretty decent shape right now even without any life insurance. We probably will get something like $300-500k range for me, to cover the scenario where we have a lot of children (closer to 6), I die when they are young before being able to add lots of savings, and where $4k/month might be not quite enough. This would let us completely pay off a mortgage and fund their college, etc, as well as bridge the years for her between kids leaving and eligibility for retirement/pension/SS.

For my wife, if she dies (Scenario B) according to her earnings from SS we currently get:
  • 1 child - $1,120/month
  • 2+ children - $1,120/month
We have no idea what to insure her at...

A few questions:
  • It sure seems like in Scenario A that unless DW works, none of the benefits are taxable - I'm not sure how to make sense of this though
  • In Scenario B, if I continue working, 50% of her benefit is taxable
  • What would other people purchase for life insurance on either of us in this sort of situation?
  • What other factors should we consider?
Note: I crossposted this to Bogleheads since I am interested in both perspectives.
« Last Edit: April 25, 2015, 03:46:59 PM by ender »

lhamo

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Re: SAHP, Social Security, and Life Insurance and taxes
« Reply #1 on: April 25, 2015, 05:40:18 PM »
Do you have a mortgage, or plan to get one?  If so I would get at least enough on both of you to ensure you can pay it off with the life insurance proceeds.  You don't have to do that if it doesn't make sense at the time, but it gives you the option and greatly decreases your costs at a time when you may need to cut back on work to deal with the emotional fallout of a premature death.

I would probably get around $500k on her.  Maybe more given the possibility that you might have so many kids.  If any of them are below school age and something happens to your wife, you are going to have massive childcare costs. 

In our case, I looked at the figures and realized that the social security benefit would pretty much equal what each of us contributes to the monthly expenses.  Employer provided life insurance + a little bit of our liquid (including contributions to Roths, if needed)  would pay off the mortgage.  So we haven't purchased separate term life policies.  We are pretty much FIREd now, given our asset base, but as I have just quit my job I might look into getting a 10 year term policy on myself just to make sure DH wouldn't have any financial issues at all if I were to go  prematurely.  Knowing the choices I would make if he went first (sell the apartment, which would generate a huge profit), I don't think it is necessary to get a separate policy on him. 

Good that you are looking into the social security benefit.  I am always surprised by how many people are completely oblivious to it.  My mom and I benefitted from it when my dad died at 52 (when I was 15), so I know what a great thing it is. 



ender

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Re: SAHP, Social Security, and Life Insurance and taxes
« Reply #2 on: April 26, 2015, 01:16:41 PM »
Do you have a mortgage, or plan to get one?  If so I would get at least enough on both of you to ensure you can pay it off with the life insurance proceeds.  You don't have to do that if it doesn't make sense at the time, but it gives you the option and greatly decreases your costs at a time when you may need to cut back on work to deal with the emotional fallout of a premature death.

We plan on it.

Quote
I would probably get around $500k on her.  Maybe more given the possibility that you might have so many kids.  If any of them are below school age and something happens to your wife, you are going to have massive childcare costs. 

We currently have $500k on her and $750k on me.

Quote
We are pretty much FIREd now, given our asset base, but as I have just quit my job I might look into getting a 10 year term policy on myself just to make sure DH wouldn't have any financial issues at all if I were to go  prematurely. 

Yeah... we're not there yet :)

Quote
Good that you are looking into the social security benefit.  I am always surprised by how many people are completely oblivious to it.  My mom and I benefitted from it when my dad died at 52 (when I was 15), so I know what a great thing it is.

I had no idea it existed until pretty recently, someone else posted about it here and so I investigated.

There is SO MUCH in the world of personal finance which is beneficial to know that no one ever teaches - the SS benefits are definitely one of them.

MayDay

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Re: SAHP, Social Security, and Life Insurance and taxes
« Reply #3 on: April 26, 2015, 01:53:05 PM »
I would probably get the std. amount your job provides for you, or whatever multiple you can get for a good price.  Somewhere in the range of paying off the house and/or paying for kids college.  They can live on the monthly SS just fine, even with lots of kids, IMO.  You can always add more if you end up with a bunch if kids. 

For her, I think 300k is about right.  You really will need to think about how much will cover a nanny for 18 years- plus a little extra for a housecleaner and some extra convenience food, so let's say a nanny is 30k a year (varies wildly with COL), that gives you ten years.  I said 18 years, but you probably don't need the nanny full time for more than 5 of those years. 

I tend to think people get wayyyyyyyy too much life insurance.  SS covers most of your expenses, and the odds are very low you will die- especially right away.  Plus, you already have a decent chunk of money saved, and your wife isn't even pregnant yet. 

ender

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Re: SAHP, Social Security, and Life Insurance and taxes
« Reply #4 on: April 26, 2015, 07:04:53 PM »
We're going to go with $750k on me and $500k on her.

Our stash isn't large enough yet for me to be comfortable with fully paying retirement for either of us yet should something happen in the next few years (though extrapolating no more contributions at 6% return after inflation DOES make us millionaires at age 60, CRAZY). I'm ok paying a bit extra now to lock in the ability to have meaningful term policies.

frugaldrummer

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Re: SAHP, Social Security, and Life Insurance and taxes
« Reply #5 on: April 26, 2015, 10:11:27 PM »
I have a friend who receives social security widows benefits for herself and her son. A few things to consider:
 _ make sure your calculations are correct. Your numbers seem high given your age and work history. My friend's husband made less but had a 40+ year work history and she gets significantly less than that.

_ your wife's benefits would be reduced if her income rises above a certain amount. I don't remember the numbers but I'm pretty sure it's less than $2000 a month. I don't know if this applies only to earned income or to investment income ss well (I suspect both).

_ her ss widows benefit will kick out when the child turns 16 (I guess the presumption is that a 16 year old can be a latchkey kid and mom can get a job). The child's benefit continues to age 18. She can get the widows benefit again when she turns 60 if she is still single.