Author Topic: Term Life Insurance. How much coverage? What is a typical premium?  (Read 6426 times)

cincystache

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Hello MMM community. I'm considering buying some life insurance for my wife and I.

Age: 28
Debt : 26,000 in SL @ 4.875%
Assets: 115,000
FI spending forecast: 30,000 per year

We currently have no life insurance but are considering starting a family in the next year. Any guidance on how much coverage we should get and/or where to shop etc would be appreciated. We are planning on being FI in about 8-10 years.

mxt0133

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #1 on: December 10, 2014, 07:48:08 PM »
Normally you start with how much income you need to replace in the event of the insured's passing and how long you need that income for.  Which is a present value calculation of those cash flows and that's how much you would need.  The thing is you need a lot of assumptions, if you are early in your career your earnings could go up significantly and it's hard to estimate your future earnings, so you could get additional coverage then.

Get quotes on level term and guaranteed annual renewable term and see what makes sense in your situation.  I just learned about annual renewable term which is around 1/2 to 2/3 the premium of a level term initially but goes up as the years progress.  The only reason why I would look at that option in your situation is that you intend to retire in a few years and presumably would not need life insurance once you FIRE.

woodnut

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #2 on: December 11, 2014, 09:09:04 AM »
Opinions will vary but here is my take on life insurance.  My opinion is probably more conservative than most on this forum.  Calculations should be based upon projected expenses, not income.  My wife is a SAHM and her income earning potential is much lower than mine.  So, I insure myself, such that if I died, she could be a SAHM and FI permanently.  So my policies are such that she would reach 25x expenses immediately.  I also factor in 2 fully paid in-state college tuitions.  I also have a couple of policies with staggered terms, such that as we get closer to FI we can drop policies.  In fact I called yesterday to cancel one of them.  My wife is insured such that I could be a full time SAHD until the kids reach high school/college age, then I would return to work.

In your case, with my strategy, the max policy would be (30,000 x 25) - (115,000-26,000) = 661,000.  This would be an immediate FI number.  Factoring in social security survivor benefits (if you have kids) and the number would be reduced.  College tuition would raise it.  I would also consider each of your earning potentials and whether you want permanent FI or just the ability to stay at home while the kids are in their formidable years.  If you are FI in 8-10 yrs then you would only need a 10yr term.  At 28 yrs old, non-smoker, in good health, your rates would be really low.  Family history affects your rating significantly also.  Get the policies before you turn 30, otherwise you will be bumped up to a different rate group.  Also if you get a policy on your wife, do it before she gets pregnant.  She will not be able to be underwritten, while she is pregnant.

Ultimately, I would decide the scenarios and conditions that would be most comfortable for you and your wife should the unfortunate happen, trading off the monthly expense, and run the numbers based upon that.
« Last Edit: December 11, 2014, 09:14:27 AM by woodnut »

cincystache

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #3 on: December 11, 2014, 05:15:10 PM »
Thanks for the replies woodnut and mxt. Very good advice.

APowers

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #4 on: December 11, 2014, 09:03:15 PM »
Opinions will vary but here is my take on life insurance.  My opinion is probably more conservative than most on this forum.  Calculations should be based upon projected expenses, not income.  My wife is a SAHM and her income earning potential is much lower than mine.  So, I insure myself, such that if I died, she could be a SAHM and FI permanently.  So my policies are such that she would reach 25x expenses immediately.  I also factor in 2 fully paid in-state college tuitions.  I also have a couple of policies with staggered terms, such that as we get closer to FI we can drop policies.  In fact I called yesterday to cancel one of them.  My wife is insured such that I could be a full time SAHD until the kids reach high school/college age, then I would return to work.

In your case, with my strategy, the max policy would be (30,000 x 25) - (115,000-26,000) = 661,000.  This would be an immediate FI number.  Factoring in social security survivor benefits (if you have kids) and the number would be reduced.  College tuition would raise it.  I would also consider each of your earning potentials and whether you want permanent FI or just the ability to stay at home while the kids are in their formidable years.  If you are FI in 8-10 yrs then you would only need a 10yr term.  At 28 yrs old, non-smoker, in good health, your rates would be really low.  Family history affects your rating significantly also.  Get the policies before you turn 30, otherwise you will be bumped up to a different rate group.  Also if you get a policy on your wife, do it before she gets pregnant.  She will not be able to be underwritten, while she is pregnant.

Ultimately, I would decide the scenarios and conditions that would be most comfortable for you and your wife should the unfortunate happen, trading off the monthly expense, and run the numbers based upon that.

Basically this. We didn't put as much specific thought into it as Woodnut, but I'm insured for enough that my wife will be FI immediately (and then some). I think it was $500,000. It costs us $17/mo; stats: male, 25, good health, non-smoker, yadayadayada.

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #5 on: December 11, 2014, 09:20:41 PM »
At age 45 and single, I took out $600,000 for 15 years at $535/year. Now that I am 50 and my kids are older, I may not renew. Thought this might give you an idea about premiums. I shopped on eterm.com to get that rate.

La Bibliotecaria Feroz

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #6 on: December 12, 2014, 07:35:44 AM »
We have enough on my husband, our main breadwinner, that the boys and I could pay off a mortgage or buy a house (we haven't bought yet, but I don't want to live in this rental townhouse forever) and enough on me to help cover increased childcare costs--$350K on him and $100K on me, plus a little more that we have through our jobs. College tuition was not a big concern for us as my grandfather is funding the kids' 529s.

Don't forget to consider the worst-case scenario: That you and your wife both die before reaching financial independence, leaving your children to be raised by others. My sister would probably take in my kids (need to ask her and make a will), but as she already has three kids in a three-bedroom townhouse, she would need a larger abode.

Le Barbu

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #7 on: December 12, 2014, 07:53:57 AM »
At age 45 and single, I took out $600,000 for 15 years at $535/year. Now that I am 50 and my kids are older, I may not renew. Thought this might give you an idea about premiums. I shopped on eterm.com to get that rate.

tracylayton, ask for another quote right now and I would not be surprised if the new quote is lower. I did the same 3 years ago and it works fine. The reasons? 1st, you connot die from 45-50 because you already went trough those 5 years. 2nd, if your situation (health, etc) is not worse than 5 years ago, you are getting ahead the average. You may get a 10 years for +/- 250$/year for that same 600k. Also, you could get a lower coverage (let say 400K) for a mere 150$/year.

my 2 cents

Le Barbu

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #8 on: December 12, 2014, 08:09:24 AM »
Opinions will vary but here is my take on life insurance.  My opinion is probably more conservative than most on this forum.  Calculations should be based upon projected expenses, not income.  My wife is a SAHM and her income earning potential is much lower than mine.  So, I insure myself, such that if I died, she could be a SAHM and FI permanently.  So my policies are such that she would reach 25x expenses immediately.  I also factor in 2 fully paid in-state college tuitions.  I also have a couple of policies with staggered terms, such that as we get closer to FI we can drop policies.  In fact I called yesterday to cancel one of them.  My wife is insured such that I could be a full time SAHD until the kids reach high school/college age, then I would return to work.

In your case, with my strategy, the max policy would be (30,000 x 25) - (115,000-26,000) = 661,000.  This would be an immediate FI number.  Factoring in social security survivor benefits (if you have kids) and the number would be reduced.  College tuition would raise it.  I would also consider each of your earning potentials and whether you want permanent FI or just the ability to stay at home while the kids are in their formidable years.  If you are FI in 8-10 yrs then you would only need a 10yr term.  At 28 yrs old, non-smoker, in good health, your rates would be really low.  Family history affects your rating significantly also.  Get the policies before you turn 30, otherwise you will be bumped up to a different rate group.  Also if you get a policy on your wife, do it before she gets pregnant.  She will not be able to be underwritten, while she is pregnant.

Ultimately, I would decide the scenarios and conditions that would be most comfortable for you and your wife should the unfortunate happen, trading off the monthly expense, and run the numbers based upon that.

Basically this. We didn't put as much specific thought into it as Woodnut, but I'm insured for enough that my wife will be FI immediately (and then some). I think it was $500,000. It costs us $17/mo; stats: male, 25, good health, non-smoker, yadayadayada.

Agree but I think there is only one flaw. When taking a term insurance, your actual age group is less important than your actual situation compared to your age group.

Also, my tip is to get a 10 years contract and ask a quote after 5-8 years. Most of the time, you'll get a new offer for another 10 years for the same price or lower (look at my reply to tracylayton).

Last thing, after FI, I would just decrease the coverage but still keep a minimum one in case my beloved have to pay for a huge tax bill, repay a investment loan or anything else without having to cash some assets. For me, 100k will be my minimum coverage (actualy 500k for 275$/year).
« Last Edit: December 12, 2014, 08:11:47 AM by Le Barbu »

Cromacster

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #9 on: December 12, 2014, 08:46:28 AM »
Edit: You can ignore this if you want, I just reread and saw they were planning on having kids.

For a couple with dual incomes no kids (Dinks if you will), who are good at saving, I tend to lean towards not needing life insurance.

That's part of whats great about trying to be frugal/mustachian.  You are setting yourselves up to be in a strong position in life.  A combination of smart lifestyle planning, low expenses, and high savings rate create this strength.  In the event one of you were to die, the widow should still be in a strong position financially.

Assuming you don't have a cosigner and you weren't married at the time the debt was taken, it also goes away (assuming the debtor dies).

This of course changes if you rely on one income, have kids, crazy spending, crazy debt, etc..

Bob W

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #10 on: December 12, 2014, 09:27:51 AM »
IMHO,

Here is why you shouldn't buy life insurance at all -- I know crazy huh?  And I carry a life insurance license.

First,  check the SSI payouts for surviving spouses and children.  They are relatively hefty. You'll be surprised.  This is in fact life insurance you are already paying for through your SS deductions on your check.

Second,  It is a truism and often very true that surviving spouses often piss away all the money no matter the amount in less than 18 months.  I've seen many people burn through 500K in less than a year.  They are depressed and just won a mini lottery so they spend it all. 

Your better off focusing on how to safely manage your assets after death for the kids benefit.  This is tricky.  You'll want to average an 8-9% return with low trust fund fees and a semi aggressive management policy.

If you do decide to buy the life insurance be sure to set up the trust and trustee guidelines ahead of time through a trust attorney.  Then have the insurance pay the trust, not the spouse.  Be sure to make it clear that there is to be only a small payout upon death and the trustee management must be in a Vanguard type s and p 500 and that the trustee annual fee can't be above 1% with a maximum payout of 4% annually and perhaps a bonus payout when the kids reach certain milestones or ages. 

The good news is you have time to put this together and do a lot of research.  Your chances of death are very close to zero.  It is very good you are thinking ahead. 

minimustache1985

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #11 on: December 12, 2014, 09:46:53 AM »
Since you plan to be FI in 8-10 years, I would get a 10 year term.

We have 250k which is not enough to get us to FIRE, but enough to give the widow time to restructure their life and when we have kids there is a SSI payout that will help raise them in addition.  We don't have kids yet but similarly are planning on it in another year or two, and as we continue to build a stash and pay down the mortgage, the 250k becomes closer to being sufficient.

ETA to clarify: SSI payouts for surviving spouses are only if the spouse is raising a child.  Widow/er benefits without children are simply that they can collect their spouses SSI when they reach retirement age instead of- but not in addition to- their own.
« Last Edit: December 12, 2014, 10:00:32 AM by minimustache1985 »

Peony

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #12 on: December 12, 2014, 11:21:01 AM »
Good information, Bob Werner. Thank you.

cincystache

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #13 on: December 12, 2014, 11:45:39 AM »
Thanks for the replies. I knew I would get some great advice. I will look in to a 10 year policy to bridge the gap between now and FI. I also like your perspective bob w. I didn't even think about SS benefits. Very good point.

Le Barbu

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #14 on: December 12, 2014, 12:08:26 PM »
IMHO,


If you do decide to buy the life insurance be sure to set up the trust and trustee guidelines ahead of time through a trust attorney.  Then have the insurance pay the trust, not the spouse.  Be sure to make it clear that there is to be only a small payout upon death and the trustee management must be in a Vanguard type s and p 500 and that the trustee annual fee can't be above 1% with a maximum payout of 4% annually and perhaps a bonus payout when the kids reach certain milestones or ages. 


Bob, can you give us any idea of the price range we should pay (paid upfront I assume) to set this kind of plan?

How do you make sure the annual fees will be close or under 1% ? They get pay with a % or a fix annual ammount (so the bigger the insurance, the lower administration fee %)?

FarmerPete

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #15 on: December 12, 2014, 12:42:58 PM »
First, check to see what you get from your employer.  My last job had a 20k policy on all salaried employees.  My current job has 2x annual salary policy.  That's ~$120k of free insurance on me right there.  I ended up buying $300k of additional insurance through my work for me, and $35k on my wife.  She is a SAHM.  We've got about 80k in cash & non-retirement accounts & owe ~80k on the mortgage with 65k in equity.  I figured that I wanted to provide enough that she could take some time to recover & then get some skills or remarry.  We've got a 2yr old, so she'll get an SS payments of $30672 per year until my son is 18.  That should cover the lion's share of the expenses if not everything.  If she can't live off $30k + $500k in cash/insurance, she won't be able to live off a million in life insurance.  I took the $35k on my wife to cover me if I want to take some time off work to get my life sorted.  I certainly wouldn't start staying at home unless I was at or near FI.

For the 300k on me and 35k on my wife, I pay $24 a month ($288 a year).  Because it's through my employer, there are downsides.  It's not really portable, and the price isn't locked in.  It will go up as I age.  I went through the process of getting quotes on term life from other companies, but it was significantly more expensive.  Part of my problem is that since March of 2013, I've lost 110 lbs.  I still have a little more weight to lose, but I'm obviously significantly healthier than I was when I started.  While my blood levels and fitness levels are all pretty good right now, most insurance companies will overcharge you until you have kept the weight off a year.  My plan is to reapply in the spring and see if I can get into a better bracket.  I know that I'll probably end up paying more for insurance than I am paying now, but I'll have a 20-30 year term on it, so my rates wont go up.  If I kept my current coverage at work, at age 50, I'll be paying 4x what I'm currently paying.  By locking it in for 30 years, I can potentially pay a lot less overall...and it's transferable.

Le Barbu

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #16 on: December 12, 2014, 01:02:55 PM »
My plan is to reapply in the spring and see if I can get into a better bracket.  I know that I'll probably end up paying more for insurance than I am paying now, but I'll have a 20-30 year term on it, so my rates wont go up.  If I kept my current coverage at work, at age 50, I'll be paying 4x what I'm currently paying.  By locking it in for 30 years, I can potentially pay a lot less overall...and it's transferable.

Good plan FarmerPete

I don't know if it's different in the US but here in Canada, you can get what they call a "T-10". The contract can cover 30 or 40 years (I think there is a limit age like 70 or so were you are no longer covered, anyway) but the price rise every 10 years. On my contract (T-10), I know upfront how much it's gonna cost for the next 10 years, same for the second "decade" (about twice $/year). Same for the 3rd and 4th decade. In fact, the price +/- double every 10 years. If you don't want or cannot get a new quote before the rise hit, you can decraese the coverage, in line with FI plan.

Scandium

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #17 on: December 12, 2014, 01:50:14 PM »
People here have low policies, or I have a high one. We just had a child so I signed a policy on me for $1 million, 20 years. At $420/year. Math was something like:
Pay off house $300K
College $150K?
daycare 6 years+ ~$100k ($15k+/year)
My share of costs ~$100K

So over $600K. Plus with inflation over 20 years etc, one million seemed like a reasonable number. Once the kid is in his teens I'll reevaluate based on our savings etc, but for now I'm more comfortable with this. I always count social security as zero so have no idea how much, if any that would pay.

dios.del.sol

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #18 on: December 12, 2014, 02:44:06 PM »
Good insight here. FYI, I just asked a similar question here. You may be interested in the replies.

FarmerPete

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #19 on: December 12, 2014, 02:49:20 PM »
People here have low policies, or I have a high one. We just had a child so I signed a policy on me for $1 million, 20 years. At $420/year. Math was something like:
Pay off house $300K
College $150K?
daycare 6 years+ ~$100k ($15k+/year)
My share of costs ~$100K

So over $600K. Plus with inflation over 20 years etc, one million seemed like a reasonable number. Once the kid is in his teens I'll reevaluate based on our savings etc, but for now I'm more comfortable with this. I always count social security as zero so have no idea how much, if any that would pay.

What you save has to do with multiple factors.  No one (not even the selfless insurance agents) can tell you what is right for you.  You need to look hard at what your lives will look like when one/both of you pass away.  Quite honestly, the $30k that SS will pay my wife will cover pretty much everything except the mortgage.  My goal isn't to replace me with a big bag of $$$.  It may sound selfish on my part, but I want my wife to move on if I die.  Forcing her to get a job or a new source of income is part of that.

16 years till my son is 18.  Lets assume $80k cash assets, and $420k insurance payout.  That's $500k of available money.  Lets assume my wife pays $80k on the house immediately.  Living expenses for her would be ~$34k or less.  Now lets assume $30k income from SS.  Assuming my wife paid off the house immediately, had $420k left and spent $4k a year of the insurance money, at the end of the 16 years, assuming 6% growth, she would have $983k in savings when my son graduates.  At that time, she will be 50.  She will have to live on that 1 million for 17 years.  At which point she will be eligible for SS.  My current 401k balance should have grown to $916k by then.  This is all assuming she is producing absolutely zero income.  God willing, she will get a job at some point and work.

The hard part though is that I'll be dead.  I don't want to sound cold, but she can deal with it however she wants to.  She can blow all the money on booze, or she can carefully plan it out to the penny.  She can get a job, get remarried, or move to Mexico.  It's my job to set her and my son up for success.  I wont accept the financial responsibility of guaranteeing that, nor could I if I wanted to.  Even if I took out a 10 million policy, she could blow that just as easily.  I do like the idea of the trust.  I should look in to setting something like that up when I purchase insurance directly.

MooseOutFront

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #20 on: December 12, 2014, 03:30:27 PM »
We have $500k 20 yr level term on eachother plus work 1-2x salary plus SSI survivor. Additionally our mortgage is affordable and either have earning ability to be fine as a single parent. We pay about $250 per year each for the 2 $500k policies. They are from age 32 through 52. I don't intend to need anything further then.

Nobody's getting rich off the above but it's a nice sum on top of existing savings.

From my experience many people WAY overshoot how much life insurance they buy.
« Last Edit: December 12, 2014, 03:32:03 PM by MooseOutFront »

tuliptown

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Re: Term Life Insurance. How much coverage? What is a typical premium?
« Reply #21 on: December 13, 2014, 09:11:36 AM »
Some great advice in this thread. 
Bob W is right about taking SS benefits into account. 
Farmer Pete has some reasonable ideas, too.
and, I agree with the commenter who cautioned having a living will trust to help guide the use of the money.

The only thing I can add that I did not see is that you need to make some assumptions about the growth of the money and how long it will produce X dollars.  An excel spreadsheet or HP 12-C calculator will allow you to plug in the windfall from insurance and SS benefits can be thought of as an annuity to add to it.  Then subtract yearly payments of how much you think you will need.  Add a reasonable return or yield + return to the interest rate.
All this (yes, it takes some work) to understand that you can stretch the money a LONG ways so only get what you need to help support you while the kids are growing.

For our family of 4 young kids, I have a 20 year term for 200,000 for my SAHM and 3X salary for me.  For hers I pay about $220 a year.  Cheap insurance.  I figure that with SS bennies and insurance I have an income stream of around $55,000 a year before I have to touch principle (8.25% return assumed).  Considering that the retirement fund and other investments are not included, that feels like a really nice safety net for not a whole lot of yearly outlay.  I plan on ending the contract when the last child is 18.