Term Life Insurance

[wageslave23]

Have any smart bloggers done an analysis on what term lengths are best or what the expected value per dollar is for term life insurance?  I'm considering two 10 yr policies vs. one 20 yr policy, etc., or a 15 yr policy, etc.  I'm suspecting that if all goes well healthwise, you are better of doing shorter terms and renewing every 10 yrs. 

Part of me thinks that I will always need to have life insurance on myself because I'm not confident my spouse can live on our stache amount at half the social security income. 

[XGE]

Well, it seems that you are assuming with the multiple short-term policy idea that you will be perfectly healthy when the original term is up and that you won't fail the physical for the next policy.  You may find that your body fails you on that account.  (Don't ask me how I know.)  What then? 

[wageslave23]

Well, it seems that you are assuming with the multiple short-term policy idea that you will be perfectly healthy when the original term is up and that you won't fail the physical for the next policy.  You may find that your body fails you on that account.  (Don't ask me how I know.)  What then?

Correct.  That's the risk.  So I am trying to figure out what I'm potentially gaining by taking on that risk so that I can do a clear cost benefit analysis.

[YttriumNitrate]

Doing a quick check over at Zander Insurance, it looks like a 32 yr man in top health can get a 10 yr $500k policy for $157/yr or a 20 yr $500k policy for $234/yr. A 42 yr man in top health can get a 10 yr $500k policy for $276/yr.

Using those numbers, total cost of back-to-back policies would be $4330 while a single 20-year policy would be $4680. So, a savings of $350. Of course, most of the savings comes at the beginning, so the compounded value of the savings would be significantly more.

[FireBound]

Well, it seems that you are assuming with the multiple short-term policy idea that you will be perfectly healthy when the original term is up and that you won't fail the physical for the next policy.  You may find that your body fails you on that account.  (Don't ask me how I know.)  What then?

100% agree with this.  A 30 year old is likely to be healthier than a 40 year old than a 50 year old, statistically speaking.  Having to take lipid panels and ensuring top health at age 40 or age 50 for most people is going to be tough.

[lifeisshort123]

I have two policies, that were bought several years apart.  One was bought just after our marriage, just in case.  It is a 30 year policy.

About 5 years later, I recognized I really needed a fuller policy, so I purchased another 30 year policy. 

Additionally I buy the group term insurance through work because it is relatively cheap.  It caps out at $300,000, so it is not enough on its own.

I would not recommend ever using employer life insurance as your primary approach to life insurance, even if you are buying an individual life insurance policy.  There are too many unknowns, however as a SUPPLEMENT, I think there is some merit to having it.

Also, be sure to NEVER cancel an existing policy until the new policy is confirmed and in effect.  I know people who faithfully paid premiums for MANY years, cancelled, tragedy struck, and they were uninsurable.  It seems obvious, but please, just don’t do it.

[pdxvandal]

Is your current 'stash healthy enough where you don't need life insurance at all? I canceled my term policy several years ago and will never get another one mostly to enough $$ in investments. Plus, I have a $90k policy through work. My investment portfolio coupled with social security survivor benefits and the work policy is more than enough insurance if I kick the bucket unexpectedly.

[Michael in ABQ]

$500k of $1M of term insurance is going to be hundreds of dollars a year if you're relatively young and healthy. If you expect to be self-insured in 10-15 years, I would look at that as the term length. The difference in premiums between a 10-, 15- or 20-year term is going to be miniscule relative to the amount of coverage.

My $500k policy I purchased in my early/mid-30s was about $350 a year for a 15-year policy. Going to a 20-year was going to be another $100-150 and dropping to a 10-year was going to save $50-100. I figured in 15 years all/most of our kids would be through college and our savings (plus Social Security) would be more than enough to support my wife and the rest of our minor kids if I died.

[slappy]

For a younger, healthy person, term life insurance seems cheap enough that I buy the longest term possible. Maybe if I get to Bogle Head-style FIRE, I would cancel, but other than that, why not have it?

[AMandM]

Another possibility is only the 10-year term, if you expect that in 10 years your stash will be enough to support your family along with whatever income the surviving spouse can be expected to earn. When we had small kids and I was a SAHM, DH and I each had term life that was enough to pay off the house and support the family till the kids were in school and survivor could work without undue stress. Later on, we dropped it, when the kids were old enough to take care of themselves and the surviving spouse would not need additional financial support beyond SS, the stache, and his/her job.

[Laura33]

I would focus on a length of the term that coincides with your anticipated need for insurance; if you think you will always need insurance, then get the longest term you can.

There are two aspects to FIRE.  The one we focus on here is maximizing gains/growth.  But the other aspect is minimizing your downside risk.  When you're early in the journey, the former is more important than the latter, and then the two slowly approach each other and ultimately switch places as you have more to lose.  But both always have a key role in your long-term success.

When your focus is maximizing growth, optimization is critical, as every penny saved is another penny that both goes to investment and decreases the size of the 'stache you need.  When your focus is minimizing risk, monetary optimization is less critical; the key is effectively mitigating that risk.

Insurance is part of minimizing your downside risk.  Therefore, the question is which option will most effectively mitigate the risk that everything goes into the shitter?  A shorter-term policy saves you a few bucks but leaves you open to the risk that things change before/during one of your renewal periods -- not just your own health changing, but changes to the market beyond your control.*  So that longer-term policy does the job assigned to it better than a shorter-term policy does, which means it's worth the relatively minimal upcharge.**


*I do insurance for our firm.  Our cyber insurance just basically doubled -- not because we've had any problems, but because insurance companies totally underpriced the risk for several years, and now they have to jack up premiums across the board.  You see that in individual insurance policies too when you have big natural-disaster years, because the companies have to make enough money to stay in business, and they can't get all of it from the people who caused the losses.

**Obviously you can't be stupid about it -- if a 20-yr term cost 3x a 10-year term, the up-front cost difference would more than offset the risk reduction from the additional term.  But you won't see that, because the insurance companies employ many very smart actuaries who get paid a lot of money to figure out exactly how much they need to charge for a 10-yr vs. a 20-yr term.  This is one area where I'd trust the actuaries to do their job and assume the risk differential is priced appropriately vs. spending a lot of my own time trying to optimize a couple hundred bucks over two decades.

[wageslave23]

I would focus on a length of the term that coincides with your anticipated need for insurance; if you think you will always need insurance, then get the longest term you can.

There are two aspects to FIRE.  The one we focus on here is maximizing gains/growth.  But the other aspect is minimizing your downside risk.  When you're early in the journey, the former is more important than the latter, and then the two slowly approach each other and ultimately switch places as you have more to lose.  But both always have a key role in your long-term success.

When your focus is maximizing growth, optimization is critical, as every penny saved is another penny that both goes to investment and decreases the size of the 'stache you need.  When your focus is minimizing risk, monetary optimization is less critical; the key is effectively mitigating that risk.

Insurance is part of minimizing your downside risk.  Therefore, the question is which option will most effectively mitigate the risk that everything goes into the shitter?  A shorter-term policy saves you a few bucks but leaves you open to the risk that things change before/during one of your renewal periods -- not just your own health changing, but changes to the market beyond your control.*  So that longer-term policy does the job assigned to it better than a shorter-term policy does, which means it's worth the relatively minimal upcharge.**


*I do insurance for our firm.  Our cyber insurance just basically doubled -- not because we've had any problems, but because insurance companies totally underpriced the risk for several years, and now they have to jack up premiums across the board.  You see that in individual insurance policies too when you have big natural-disaster years, because the companies have to make enough money to stay in business, and they can't get all of it from the people who caused the losses.

**Obviously you can't be stupid about it -- if a 20-yr term cost 3x a 10-year term, the up-front cost difference would more than offset the risk reduction from the additional term.  But you won't see that, because the insurance companies employ many very smart actuaries who get paid a lot of money to figure out exactly how much they need to charge for a 10-yr vs. a 20-yr term.  This is one area where I'd trust the actuaries to do their job and assume the risk differential is priced appropriately vs. spending a lot of my own time trying to optimize a couple hundred bucks over two decades.

Very nice analysis.  I guess now my struggle is figuring out exactly how much I need and for how long.

In some ways, the worst time for me to die would be in my 60s. The kids would be out of the house so she wouldn't qualify for extra survivor benefits. And she wouldn't have been working for a couple decades so low social security, and not easy to rejoin the workforce, and living on one social security payment instead of the two of us living on two payments. 

That's what sucks about doing say a 30 yr term. That puts me at 67. Then getting a 10 or 15 yr policy would be a nightmare I would think.

Right now I have a 10 yr policy that would expire when I am 47 and we would be FIRE by then. So I could reevaluate if we even need insurance and if we do I could sign up for a new term before 50.

[YttriumNitrate]

In some ways, the worst time for me to die would be in my 60s. The kids would be out of the house so she wouldn't qualify for extra survivor benefits. And she wouldn't have been working for a couple decades so low social security, and not easy to rejoin the workforce, and living on one social security payment instead of the two of us living on two payments. That's what sucks about doing say a 30 yr term. That puts me at 67. Then getting a 10 or 15 yr policy would be a nightmare I would think.

Based on your plan, if you die in your 60s your wife would likely have over a million dollars, a paid off house, social security, and a $40k/yr lifestyle. That's not exactly "living on one social security payment."

We are a bit less frugal but will probably end up being around 40k spend with a paid off house. So we are shooting for 1.2 million stache with a paid off house. Either of us could go back to work but I would dread it. So I want to be very sure we would be ok before pulling the plug.  Friends, fellow forum posters, and my spouse had me second guessing retiring with less than $2 million saved with a young child and another possibly on the way.

[slappy]

I would focus on a length of the term that coincides with your anticipated need for insurance; if you think you will always need insurance, then get the longest term you can.

There are two aspects to FIRE.  The one we focus on here is maximizing gains/growth.  But the other aspect is minimizing your downside risk.  When you're early in the journey, the former is more important than the latter, and then the two slowly approach each other and ultimately switch places as you have more to lose.  But both always have a key role in your long-term success.

When your focus is maximizing growth, optimization is critical, as every penny saved is another penny that both goes to investment and decreases the size of the 'stache you need.  When your focus is minimizing risk, monetary optimization is less critical; the key is effectively mitigating that risk.

Insurance is part of minimizing your downside risk.  Therefore, the question is which option will most effectively mitigate the risk that everything goes into the shitter?  A shorter-term policy saves you a few bucks but leaves you open to the risk that things change before/during one of your renewal periods -- not just your own health changing, but changes to the market beyond your control.*  So that longer-term policy does the job assigned to it better than a shorter-term policy does, which means it's worth the relatively minimal upcharge.**


*I do insurance for our firm.  Our cyber insurance just basically doubled -- not because we've had any problems, but because insurance companies totally underpriced the risk for several years, and now they have to jack up premiums across the board.  You see that in individual insurance policies too when you have big natural-disaster years, because the companies have to make enough money to stay in business, and they can't get all of it from the people who caused the losses.

**Obviously you can't be stupid about it -- if a 20-yr term cost 3x a 10-year term, the up-front cost difference would more than offset the risk reduction from the additional term.  But you won't see that, because the insurance companies employ many very smart actuaries who get paid a lot of money to figure out exactly how much they need to charge for a 10-yr vs. a 20-yr term.  This is one area where I'd trust the actuaries to do their job and assume the risk differential is priced appropriately vs. spending a lot of my own time trying to optimize a couple hundred bucks over two decades.

Very nice analysis.  I guess now my struggle is figuring out exactly how much I need and for how long.

In some ways, the worst time for me to die would be in my 60s. The kids would be out of the house so she wouldn't qualify for extra survivor benefits. And she wouldn't have been working for a couple decades so low social security, and not easy to rejoin the workforce, and living on one social security payment instead of the two of us living on two payments. 

That's what sucks about doing say a 30 yr term. That puts me at 67. Then getting a 10 or 15 yr policy would be a nightmare I would think.

Right now I have a 10 yr policy that would expire when I am 47 and we would be FIRE by then. So I could reevaluate if we even need insurance and if we do I could sign up for a new term before 50.

You don't have to wait until your policy expires to buy another one. If you buy 30 years now, you can buy another 30 years in ten years or so. I'm sure it will be more expensive at that point, but you could also cancel the first 30 year policy that you bought.

[Catbert]

If one of you won't be able to survive financially if the other dies in their 60s or beyond, then really you won't be FIRE at 47.  Dying isn't an "if", and it's likely that you won't die together.

[secondcor521]

If you have young kids, check out what SS survivor benefits would be available.  They're surprisingly helpful and not mentioned much.

If not, you'll likely end up self insuring, because if one of you dies, the other's living expenses will drop and the money that you were saving to pay for the person who died can now be spent on the survivor.  Although single, I don't carry life insurance - my 20-something offspring have enough in their college funds to finish their degrees, and all the money I have saved for my retirement would instead be available to them to transition into adulthood.

If you're following decent money management and have decent luck and are at a decent starting point, you'll probably be FI in no more than 15-20 years.  I wouldn't get a policy any longer than that.

I do like the idea of getting two policies - a 10 year now for a larger amount, and then a 10 year policy in about five years for maybe half that larger one.  Then you can cancel them in that same order when you figure you have enough self-insurance.

I think I would take the chance and bank on my health up to about 45 or so, but definitely not in my 50s.  And understand you're taking on a risk by doing so - I have a friend who was diagnosed with diabetes in his late 30s.  And cancers aren't unheard of in the 30s either.  You can do everything well and doing so definitely helps, but health problems can just crop up.

At the end of the day, though, term is just really cheap and also fairly price competitive, so I wouldn't spend a great deal of time agonizing over it or shopping it.  Figure out how much you need and for how long, use one of the term life shopping websites, pick an insurer with a good reputation, get the policy, put it on auto pay, then move on.  Agonizing over it more than that is going to maybe save you the price of a pizza dinner per year, and there are bigger fish to fry.

[rmorris50]

Term is too cheap to spend so much time analyzing it. Get 20 yr policies, get 1.5 or 2 times what you think you need, buy the policies, and move on with life

I bought a 1.5m 20yr term at age 32 and pay about $750 a year. I’m now 48. Also glad I did 20 years as my health isn’t super preferred anymore :-)

My DH got a 1.5m 20yt at 37 and pays about $950 a year. He is now 53.

After 20 years you prob won’t need it and can let it expire.


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[rmorris50]

Also, something like only 1% of term policies ever pay out. But if god forbid it happens to your family you want them to have options. So load up since it’s so cheap.


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[lifeisshort123]

Does anyone have a suggested amount they are thinking makes sense? I have heard 10-12 times income, but then other people like Ms. Orman say 20-25 times.

Is there a maximum amount insurers will take on?

[Michael in ABQ]

Does anyone have a suggested amount they are thinking makes sense? I have heard 10-12 times income, but then other people like Ms. Orman say 20-25 times.

Is there a maximum amount insurers will take on?

I'd look at how much your spouse/family would need over the rest of their lives that you would have been supporting them. If you've got one teenage child and a spouse that works, a lot less than have 4-5 young kids with a stay-at-home spouse.

At a minimum I would buy enough to pay for a house (or payoff your current home), take care of your kids until they're 18+ and cover potential college costs. Social Security survivor benefits will provide a decent amount as well.


Policies of $500k or $1M are pretty typical. If you try to get north of a few million an insurer may not want to take on that much risk unless you've got a good reason such as needing enough for a business. But the reality is, very few people should need more than a couple million unless they've got a home in a VHCOL area or some very inflated lifestyle that costs hundreds of thousands a year to maintain.

[rmorris50]

Probably 10times per working adult in the house hold. So if each spouse makes 100k prob 1m each spouse. If one spouse stays at home I’d say 1/2 of working spouse’s income times 10 for the stay at home. 20 to 25 times seems like a lot, you’ll probably run into much higher underwriting standards with the insurance company if you go that high. Like they might ask you to run on a treadmill :-)


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[Dee18]

The amount of life insurance you need shouldn't be based on income; as Laura33 indicated it should be based on expenses/needs. 

[lifeisshort123]

Yes, with a young one on the way we are considering making changes.  I’m considering once the child is born, healthy, etc. adding an additional policy to cover the cost of college, that would have a smaller term than the rest of our policies. 

Currently we pay for the workplace plans, but we are also considering dropping those, and switching entirely to individual coverage.

[YttriumNitrate]

Does anyone have a suggested amount they are thinking makes sense? I have heard 10-12 times income, but then other people like Ms. Orman say 20-25 times. Is there a maximum amount insurers will take on?

From Forbes:

The amount of coverage you can buy relative to your income varies by age—and can vary from insurer to insurer. Ardleigh says the standard limits are as follows:

    For adults 40 and younger, coverage is limited to 25 to 35 times annual income
    For adults ages 40 to 50, coverage is limited to 20 to 25 times annual income
    For adults ages 50 to 60, coverage is limited to 10 to 20 times annual income
    For adults ages 60 to 70, coverage can be limited to 5 times annual income

https://www.forbes.com/advisor/life-insurance/more-than-one-policy/