Term Life Insurance Basics

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Ryebrook
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Term Life Insurance Basics

Post by Ryebrook »

My wife and I just had our first child last month, and I have been looking into term life insurance for us both. We both have similar jobs and incomes, and feel that at this point in our lives, term life in the amount of $500,000 each would be sufficient. We would likely insure ourselves for 30 years, which would take us to our mid-60's.

These are probably very basic questions to some of you, but I would appreciate some insight on them.

When you buy term life, can you adjust the amount you are insured for as time goes by and less is needed? For example, if we determine our potential liabilities with remaining house payments, income lost, education for children, etc, this will (hopefully) decrease as time goes by, while (hopefully) assets go up.

Can we transition to lower and lower payouts? Five years from now, maybe we only need to be insured for $400,000, etc.

Anything else I should be looking for when shopping for a policy? Any help is appreciated!

Ryebrook
dhodson
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Re: Term Life Insurance Basics

Post by dhodson »

Inflation will take care of that for u

Insure what u need for a sufficient time with a little extra buffer and call it a day.
technovelist
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Re: Term Life Insurance Basics

Post by technovelist »

I imagine it would be possible to reduce the face amount of a policy, but you would then have been paying too much in the early years, when the risk was lowest.

It would probably be better to get several policies to add up to your desired amount, as you could cancel them as needed without quite as much overpaying.

If you can forecast the amount that you will need at various times, you could also buy some of them with shorter periods to save money on the premiums even at the beginning. However, I don't recommend this because you can't know in advance how your investments will do, and it's better to be overinsured than underinsured when you are starting at a young enough age that the premiums are very affordable in any event.
In theory, theory and practice are identical. In practice, they often differ.
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Optimistic
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Re: Term Life Insurance Basics

Post by Optimistic »

Hi Ryebrook,
Here is the wiki entry on life insurance. If you search the forum you might find 1000 different threads on life insurance as well. Generally term life insurance is a set premium for a set benefit for a set term. If you later decide you want more or less, you get a different policy (and undergo medical underwriting again.) There may be exceptions (I imagine an insurance company would be okay with letting you reduce your benefit w/o underwriting?) that I'm not familiar with as I'm not an expert. But, the difference from $500,000 to $4000,000 on a 30-year policy for a 30-something year old person in reasonable health would likely be around a hundred bucks or so a year. It's not something I would spend too much time worrying about.

If you have a wife and kid, get term life insurance (for you and your wife) ASAP. The site http://www.term4sale.com/ is an excellent resource to give you an idea of how much benefit you need and for how long. If it says you need over a million and it sounds to expensive, then buy what you can afford and revisit adding more later. But, you need to have something.

"The enemy of a good plan is the dream of a perfect plan." Mr. Bogle likes that quote and it's repeated on this forum frequently (Carl von Clausewitz originally)
Iorek
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Re: Term Life Insurance Basics

Post by Iorek »

My understanding (as explained to me by my agent) is that you can always reduce the insured amount at a later date (and the premium will be reduced).

Another strategy people use sometimes is to buy two policies with different guaranteed level premiums. For example, if you expect in 15-20 years you will only need $300k of insurance, you might buy $200k of insurance with a 20 year level premium, and $300k with a 30 year level premium. Since it costs less for a 20 year policy, you can save money that way (but you give up flexibility as compared to buying $500k now with the option of cancelling some later).
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Toons
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Re: Term Life Insurance Basics

Post by Toons »

Some insightful comments on term insurance in this thread :happy

http://www.bogleheads.org/forum/viewtopic.php?t=70147
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Quickfoot
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Re: Term Life Insurance Basics

Post by Quickfoot »

I did a ladder, 250K 30 year term, 500K 20 year term. I save a considerable amount in premium and have higher coverage during the period of time it is most beneficial. Also look into AD&D through your employer, it's a very cheap and good way to supplement term life insurance but be aware it only pays out in case of accident but while you are young accident is very likely to be your cause of death.

You can always quit paying for a policy and let it lapse so if you later decide you don't need the coverage just quit paying the premiums or call the insurance company and cancel it.
dhodson
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Re: Term Life Insurance Basics

Post by dhodson »

I disagree about a&d being worth it. There is a reason it's cheap and that's bc it doesn't typically pay.
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yatesd
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Re: Term Life Insurance Basics

Post by yatesd »

When my daughter was born, I immediately bought 15 year term life insurance for $500K on myself. My wife is a stay at home mom (so no insurance needed for her).

My thoughts...only buy what you need. I decided to put the extra money in my 401K with the goal of being essentially self insured by the time my daughter was 15.

A few other points:

- My daughter is now 8 and we are on track to have minimal debt and decent sized 401K
- My new employer now provides a supplemental $200K in life insurance
- I wouldn't go with 30 year term..who is the insurance for? Maybe 20 year...unless you intend to have 8 kids spread out over the next 10-15 years
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Ryebrook
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Re: Term Life Insurance Basics

Post by Ryebrook »

Thank you for the excellent advice. I had not thought about a ladder option of buying multiple policies in order to save a bit and manage the risk.

Both my wife and I also have life insurance through our careers...mine is 4x annual earnings, and hers is 2x (both at no cost to us). We would take this into consideration when determining our term life policies as well.

If our determined need is $500,000 each, and my policy from work covered $300,000 (4x salary), would you recommend simply buying a $200,000 term life policy? Or would you not consider the work policy?
tj
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Re: Term Life Insurance Basics

Post by tj »

Ryebrook wrote:Thank you for the excellent advice. I had not thought about a ladder option of buying multiple policies in order to save a bit and manage the risk.

Both my wife and I also have life insurance through our careers...mine is 4x annual earnings, and hers is 2x (both at no cost to us). We would take this into consideration when determining our term life policies as well.

If our determined need is $500,000 each, and my policy from work covered $300,000 (4x salary), would you recommend simply buying a $200,000 term life policy? Or would you not consider the work policy?

That depends on how stable you consider your job security.
Iorek
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Re: Term Life Insurance Basics

Post by Iorek »

For what it's worth, we did not take employer insurance into consideration and got 30 year insurance so it would cover through college (plus any younger children), but insurance is one of those things we tend not to skimp on.
Quickfoot
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Re: Term Life Insurance Basics

Post by Quickfoot »

We got term for the whole amount and consider employer coverage an extra. Add does pay out for covered events, it's cheaper because it only covers accidental death where normal life insurance covers more types of death. Our add pays out if death occurs within a year of a covered accident.
Professor Emeritus
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Re: Term Life Insurance Basics

Post by Professor Emeritus »

yatesd wrote:When my daughter was born, I immediately bought 15 year term life insurance for $500K on myself. My wife is a stay at home mom (so no insurance needed for her).
Exactly how will you replace, at no cost, the services your wife provides for your child?
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Re: Term Life Insurance Basics

Post by denovo »

Professor Emeritus wrote:
yatesd wrote:When my daughter was born, I immediately bought 15 year term life insurance for $500K on myself. My wife is a stay at home mom (so no insurance needed for her).
Exactly how will you replace, at no cost, the services your wife provides for your child?
Exactly, I think even a non-working spouse needs insurance.
"Don't trust everything you read on the Internet"- Abraham Lincoln
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Ryebrook
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Re: Term Life Insurance Basics

Post by Ryebrook »

Thanks to all of your replies, I am close to making a decision on term life insurance. I am coming here for a little reinforcement that my plan will be sufficient to meet our families needs worst-case scenario.

My thought is to insure both my wife and myself on a 25-year term policy for $750,000 each.

We are both 33 years old, and we have one child (newborn!). We do not plan to have more children, but maybe we will end up with one more down the road. :)

We have a $112,000 mortgage at 3.625%, and student loan debt of $11,800 at 5.25%.

We have an emergency fund that is around $145,000. I realize this is inflated, but we are pretty conservative. We are aggressively paying down both the mortgage and student loan, and will have the student loan completed within the next year. The mortgage should be paid off in 10-15 years.

We have approximately $300,000 in our combined 401ks, and my wife also has a pension through her employer.

My thought is that if a worst-case scenario were to happen, and one of us were to pass away, I would want to cover our remaining debt (~$125,000), child care for our son (~$40,000 through age 4), school for our son (~$80,000 kindergarten through high school, $100,000 for a start toward college), and potentially a few years of income replacement. We both make similar incomes of around $65,000/year.

Am I looking at this from the right perspective, or should I be purely worried about the # of years of income replacement a term policy would provide?

Thanks for any advice.
dhodson
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Re: Term Life Insurance Basics

Post by dhodson »

Keep in mind that all that retirement money now only needs to support one. I'd go 20 years if it were me.
sjb19
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Re: Term Life Insurance Basics

Post by sjb19 »

Get a copy of your social security statement and find out what income survivor benefits might provide. You might need less insurance than you think.
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Re: Term Life Insurance Basics

Post by Toons »

dhodson wrote:Keep in mind that all that retirement money now only needs to support one. I'd go 20 years if it were me.
+3 :happy
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Ryebrook
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Re: Term Life Insurance Basics

Post by Ryebrook »

My thought on 25 years vs. 20 was that it would cover us through our child's college years. 20 years would only get us halfway through, but now that I have written that out, extending it to 25 years seems a little redundant.
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Re: Term Life Insurance Basics

Post by abuss368 »

Ryebrook wrote:My wife and I just had our first child last month, and I have been looking into term life insurance for us both. We both have similar jobs and incomes, and feel that at this point in our lives, term life in the amount of $500,000 each would be sufficient. We would likely insure ourselves for 30 years, which would take us to our mid-60's.

These are probably very basic questions to some of you, but I would appreciate some insight on them.

When you buy term life, can you adjust the amount you are insured for as time goes by and less is needed? For example, if we determine our potential liabilities with remaining house payments, income lost, education for children, etc, this will (hopefully) decrease as time goes by, while (hopefully) assets go up.

Can we transition to lower and lower payouts? Five years from now, maybe we only need to be insured for $400,000, etc.

Anything else I should be looking for when shopping for a policy? Any help is appreciated!

Ryebrook
You really have to look at the policy and discuss with the agent. When we went with term policies, we have the option to decrease or increase the coverage level every year. The thought process is becoming older, hopefully with more assets, kids leaving the home, paying down/off debt = less fo a need for high coverage (and cost).

The best advice I ever received with Whole Life policies is they should only be considered for folks who may have estates in excess of estate tax limits.
John C. Bogle: “Simplicity is the master key to financial success."
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Toons
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Re: Term Life Insurance Basics

Post by Toons »

This oughta get the ball rollin,,,tell em Dave :sharebeer

http://www.daveramsey.com/article/the-t ... insurance/
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
dhodson
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Re: Term Life Insurance Basics

Post by dhodson »

abuss368 wrote:
Ryebrook wrote:My wife and I just had our first child last month, and I have been looking into term life insurance for us both. We both have similar jobs and incomes, and feel that at this point in our lives, term life in the amount of $500,000 each would be sufficient. We would likely insure ourselves for 30 years, which would take us to our mid-60's.

These are probably very basic questions to some of you, but I would appreciate some insight on them.

When you buy term life, can you adjust the amount you are insured for as time goes by and less is needed? For example, if we determine our potential liabilities with remaining house payments, income lost, education for children, etc, this will (hopefully) decrease as time goes by, while (hopefully) assets go up.

Can we transition to lower and lower payouts? Five years from now, maybe we only need to be insured for $400,000, etc.

Anything else I should be looking for when shopping for a policy? Any help is appreciated!

Ryebrook
You really have to look at the policy and discuss with the agent. When we went with term policies, we have the option to decrease or increase the coverage level every year. The thought process is becoming older, hopefully with more assets, kids leaving the home, paying down/off debt = less fo a need for high coverage (and cost).

The best advice I ever received with Whole Life policies is they should only be considered for folks who may have estates in excess of estate tax limits.
Whole life isn't exempt from estate taxes unless within an irrevocable trust. Not really a good reason unless the rest of the estate is highly illiquid and even then term plus more liquid investing would work.
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Ryebrook
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Re: Term Life Insurance Basics

Post by Ryebrook »

Would it be possible to construct a ladder similar to the following?

In this scenario, we would take out an $800,000 policy for each of us, and then adjust down every 10 years as our needs changed. I took the best costs on Term4Sale for each of us individually, and took their sum for the annual cost.

$800,000 - 30 years (hold 10): $1,096/year = $10,960
$600,000 - 20 years (hold 10): $525/year = $5,250
$400,000 - 10 years (hold 10): $262/year = $2,620

Total Policy Cost: $18,830 over 30 years = $628/year

In comparison, a $600,000 policy (the average of the three policies above) over 30 years would cost us $25,560.

Am I missing something?
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greg24
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Re: Term Life Insurance Basics

Post by greg24 »

We bought term life when we had our first child in our early 30s. We found that the 20 year term was much cheaper than 30 year, as death rates go up sharply in late 50s/early 60s.

You are in roughly the same time frame. I would err on the shorter side, it sounds like you are financially conservative and will have a rather large nest egg built up 20 years from now. Any money you save on term life can be invested.
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Re: Term Life Insurance Basics

Post by abuss368 »

dhodson wrote:
abuss368 wrote:
Ryebrook wrote:My wife and I just had our first child last month, and I have been looking into term life insurance for us both. We both have similar jobs and incomes, and feel that at this point in our lives, term life in the amount of $500,000 each would be sufficient. We would likely insure ourselves for 30 years, which would take us to our mid-60's.

These are probably very basic questions to some of you, but I would appreciate some insight on them.

When you buy term life, can you adjust the amount you are insured for as time goes by and less is needed? For example, if we determine our potential liabilities with remaining house payments, income lost, education for children, etc, this will (hopefully) decrease as time goes by, while (hopefully) assets go up.

Can we transition to lower and lower payouts? Five years from now, maybe we only need to be insured for $400,000, etc.

Anything else I should be looking for when shopping for a policy? Any help is appreciated!

Ryebrook
You really have to look at the policy and discuss with the agent. When we went with term policies, we have the option to decrease or increase the coverage level every year. The thought process is becoming older, hopefully with more assets, kids leaving the home, paying down/off debt = less fo a need for high coverage (and cost).

The best advice I ever received with Whole Life policies is they should only be considered for folks who may have estates in excess of estate tax limits.
Whole life isn't exempt from estate taxes unless within an irrevocable trust. Not really a good reason unless the rest of the estate is highly illiquid and even then term plus more liquid investing would work.
Perhaps I should have worded my post different. I was referring to a different strategy.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Term Life Insurance Basics

Post by Outer Marker »

Ryebrook wrote:Would it be possible to construct a ladder similar to the following?

In this scenario, we would take out an $800,000 policy for each of us, and then adjust down every 10 years as our needs changed. I took the best costs on Term4Sale for each of us individually, and took their sum for the annual cost.

$800,000 - 30 years (hold 10): $1,096/year = $10,960
$600,000 - 20 years (hold 10): $525/year = $5,250
$400,000 - 10 years (hold 10): $262/year = $2,620
You seem to be suffering from paralysis by analysis. I believe you are way over thinking this -- quite possibly to your detriment.

1. You have avoided the worst pitfall of buying any sort of whole life policy -- good on 'ya.

2. Term is ridiculously cheap for what it protects you from. The consequences of insuring a bit too much are trivial, vs the consequences of guessing too low. Don't cut it too close.

3. Personally, I'd go with $1M each 20 year level term. 25 year adds considerably to the premium you probably don't need in the out years. Your risk is highest in the early years while you are building savings, growing your earning power, with many years of potential lost earnings.

4. If you have another kid, you can buy a small new add-on policy for the late years.

5. To alleviate some anxiety, your social security survivors benefits will be substantial, but again, don't cut it too close on term.

6. Cut a check tomorrow from your $145,000 emergency fund to pay off that $12,000 student loan debt at 5.25%. Your e-fund will still exceed your mortgage. Seriously. You will not be living on the edge.
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Re: Term Life Insurance Basics

Post by inbox788 »

Ryebrook wrote:Thank you for the excellent advice. I had not thought about a ladder option of buying multiple policies in order to save a bit and manage the risk.

Both my wife and I also have life insurance through our careers...mine is 4x annual earnings, and hers is 2x (both at no cost to us). We would take this into consideration when determining our term life policies as well.

If our determined need is $500,000 each, and my policy from work covered $300,000 (4x salary), would you recommend simply buying a $200,000 term life policy? Or would you not consider the work policy?
If you benefit from the insurance, it's 100% worth it, but I think some people are overinsured for too long given the reality of the chance of passing early. Insurance companies know the numbers well. My philosophy is to insure minimally and invest aggressively so that you no longer need insurance in the future. If you need $1M, and you have $500k in retirement assets, then you only need $500k insurance. Once you reach $1m in retirement savings, you might not need any insurance at all. If the child is 10 year old, I figure some of that cost is already paid for, so you need less going forward. Paying for 30 year term is around double 20 year term, and generally not worth it to me. Invest the cash for the 20 years, and add it to the growing nest egg.

And, yes, include the work policy.

Odd, this is for single parent. Not being a single parent actually INCREASES the cost?!?
http://www.babycenter.com/cost-of-raisi ... calculator
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inbox788
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Re: Term Life Insurance Basics

Post by inbox788 »

Ryebrook wrote:Would it be possible to construct a ladder similar to the following?

In this scenario, we would take out an $800,000 policy for each of us, and then adjust down every 10 years as our needs changed. I took the best costs on Term4Sale for each of us individually, and took their sum for the annual cost.

$800,000 - 30 years (hold 10): $1,096/year = $10,960
$600,000 - 20 years (hold 10): $525/year = $5,250
$400,000 - 10 years (hold 10): $262/year = $2,620

Total Policy Cost: $18,830 over 30 years = $628/year

In comparison, a $600,000 policy (the average of the three policies above) over 30 years would cost us $25,560.

Am I missing something?
Huh? hold 10? I don't think you're looking at the rates correctly. The 30 year policy requires you to pay for all 30 years, so over $30k and you get $800k coverage. If you reduce the coverage, at best it would be proportional, which means $1100/2 or $550 for $400,000 coverage.

I think what you're trying to do is figure out how much you'd pay in 10 years, and although not exact, subject to many variables, add 10 years to your age, and see how much the 10 year term policies run. Do this again for 10 year term with your age plus 20. If your term is too short, you don't protect against increase in premiums or failing health.

With 2 working parents, I see less need for insurance. Also, depends on your support structure, like family members, etc.
inbox788
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Re: Term Life Insurance Basics

Post by inbox788 »

Outer Marker wrote:1. You have avoided the worst pitfall of buying any sort of whole life policy -- good on 'ya.

2. Term is ridiculously cheap for what it protects you from. The consequences of insuring a bit too much are trivial, vs the consequences of guessing too low. Don't cut it too close.

3. Personally, I'd go with $1M each 20 year level term. 25 year adds considerably to the premium you probably don't need in the out years. Your risk is highest in the early years while you are building savings, growing your earning power, with many years of potential lost earnings.

4. If you have another kid, you can buy a small new add-on policy for the late years.

5. To alleviate some anxiety, your social security survivors benefits will be substantial, but again, don't cut it too close on term.

6. Cut a check tomorrow from your $145,000 emergency fund to pay off that $12,000 student loan debt at 5.25%. Your e-fund will still exceed your mortgage. Seriously. You will not be living on the edge.
1) OP is underinsured, but not by much with work policies and working spouse.

2) Don't give your spouse too much incentive for your loss :o.

3&4) 500k 20 year term may be more than enough for now, and add another 10 or 20 year if another child comes along

5) You've already started building your nest egg, keep it up!

6) Yes, do it already. A no brainer! Where do you have $145k emergency cash sitting around? Earning how much (taxable) interest? You're paying $600 in interest a year (deductable?), and likely getting around $100 interest for the cash. It's like burning a $1 bill each day you keep this up, and more like $2 on weekends.
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Re: Term Life Insurance Basics

Post by Outer Marker »

For a 33 year old in good health, the difference between a 20 year level term $500K policy ($250/yr) vs. $1M ($450/yr) is only $200. Combined for both spouses, we're talking about $400/year total -- trivial for a couple making $130K. I may be conservative, but would want something in the neighborhood of 15-20x salary. Both spouses are relevant as equal bread winners, and the loss of either is going to have a huge impact on the survivors. Keep in mind there are significant costs besides lost income. You may need a nanny ($30K/yr); you may need to spend more time with your kids and not want to work 60-70 hours a week to get ahead and get promoted; you will have a lot on your mind besides money. Your standard of living and incomes may rise significantly, creating additional needs. I under-bought term in my 30's when it was super cheap, and had to go back for a second helping in my 40s with a few health issues at several times the cost for extra coverage I thought I needed. Glad I did. When I found myself unexpectedly having a major surgery a few years later, I was very thankful that family finances were not a blip among my concerns.
Independent
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Re: Term Life Insurance Basics

Post by Independent »

Ryebrook wrote:Would it be possible to construct a ladder similar to the following?

In this scenario, we would take out an $800,000 policy for each of us, and then adjust down every 10 years as our needs changed. I took the best costs on Term4Sale for each of us individually, and took their sum for the annual cost.

$800,000 - 30 years (hold 10): $1,096/year = $10,960
$600,000 - 20 years (hold 10): $525/year = $5,250
$400,000 - 10 years (hold 10): $262/year = $2,620

Total Policy Cost: $18,830 over 30 years = $628/year

In comparison, a $600,000 policy (the average of the three policies above) over 30 years would cost us $25,560.

Am I missing something?
Like inbox788, I can't make these numbers work.
If you plan to " take out an $800,000 [30 year level premium] policy for each of us, and then adjust down every 10 years " then your premiums would be:

$1,096/yr for the first ten years
approximately $852 during the next ten years, assuming you dropped $200,000 and kept $600,000
approximately $608 during the next ten years, assuming you dropped another $200,000 and kept $400,000.
That's a total cost of $25,560, weighted toward the front end.

This assumes the company allows you to reduce the face amount, and premiums reflect a $120 annual policy fee (my guess based on your numbers for a $600k policy). Note that there may also be a premium rate band at $500,000 so the $608 I'm showing may be too low.

A different way to get the same coverage is to buy:
$400,000 of 30 year level premium, plus
$200,000 of 20 year level premium, plus
$200,000 of 10 year level premium.
Because of potential premium banding, I'm not going to guess what that might cost.

If there were no volume discounts in term insurance, the first strategy would be more expensive, but it would give you the chance to change your mind if you decide later that you don't want your coverage to decrease at exactly that pace. The second would be cheaper, but you'd be more locked into a decrease schedule.
But, since the cost per thousand can vary quite a bit by how many thousands you buy, the comparison requires getting exact premium rates.

(If you're assuming you will qualify for the lowest possible rate at term4sale, you need to remember that is only an assumption at this point.)
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