Author Topic: Life Insurance Strategy  (Read 1829 times)

dios.del.sol

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Life Insurance Strategy
« on: December 08, 2014, 03:12:58 PM »
I'm planning a life insurance strategy and could use some input. We are three: wife, baby, and me. In this post, I'd like to hear how others in a similar situation have approached life insurance. I can imagine buying enough insurance to keep the surviving partner along the same path to FI. I can also imagine buying less than that assuming that the surviving partner will make some adjustments. As an alternative minimum bound, I will also consider what would happen if we both died.

Thoughts on all this? As a tag-along question, how much does it cost to die? What sort of up-front costs are typical?

chucklesmcgee

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Re: Life Insurance Strategy
« Reply #1 on: December 08, 2014, 09:42:45 PM »
Only pay to insure what you can't afford to lose. If you think your wife can get by on a smaller payout should the worst happen, do it. Otherwise it's taking a losing bet on money you could be investing.

mxt0133

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Re: Life Insurance Strategy
« Reply #2 on: December 08, 2014, 10:30:46 PM »
First you need to identified your goals for life insurance.  Is it to supplement the deceased person's income?  If so for how long?  What are the costs the might be incurred with the surviving spouse, i.e. child care, increase costs due to less time to cook, chores, ect?  Don't forget that your spouse and child will also get SS death benefits until your child reaches the age of 18.  So the goal is to come up with a figure for this in today's dollars and get a policy for that amount.

One straight forward way is, you make 50K after taxes including benefits and want to be able to keep that income until your kids graduates college say for 23 years. 

Using the following calculator below*, assuming 3% year withdrawal increase, 8% return on your investment, and 10% federal tax bracket, you would need a policy for 730K, but don't forget funeral costs and a first year buffer as your surviving family settles into the reality that you just passed a way, I would round it up to a 800K policy.

If you want to complicate the situation further, say you are saving aggressively because you're a mustachian, so after every 5 years you accumulate 200k in savings.  So you could use ladder of term policies for example one 5 year term for 250k, another 10 year term for 300k, another for 15 year term for 400k, and one last 20 year term for 200k.  The idea being that as the years progress you would have build up investments that you do not need as much insurance.

The figures are just for demonstrative purposes and you would need to calculate the FV of 50K a year in 5, 10, 15, 20 years with your assumed rate of inflation and how much you would need from that point on.

In my case that was way too much work and got a 1M 30 term that would ensure that my wife would have enough to live on until she starts working again and some funds available for college if I pass.

*http://finance.yahoo.com/calculator/saving-spending/bud05/

TerriM

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Re: Life Insurance Strategy
« Reply #3 on: December 08, 2014, 10:49:33 PM »
My husband didn't want to pay a lot for life insurance, so we got the minimum I was comfortable with for two purposes:
1.  If we both die, I want my kids provided for (that said, I haven't set up a will or trust, so the kids would be kind of screwed if this happened tomorrow), but I calculated school, care costs, and college for 3 kids.

2.  If just he dies, I want something to help out for at least 5-6 years plus college educations for them all on the theory that he could leave me pregnant, and there's no way I'm working pregnant/with 4 kids until they're all in school.

Because he believed that I should go back to work if he dies, we only got a 20 year term.  At the time, it was just long enough to cover our youngest child into college.
« Last Edit: December 08, 2014, 11:54:10 PM by TerriM »