Term life questions

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bbrock
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Term life questions

Post by bbrock »

Hi Bogleheads,
I have begun looking at term life insurance. Per this site, I have been shopping at Term4Sale. To provide some background: my wife and I are both employed, have 19 mo. young twin boys, have a mortgage with $297k outstanding, my wife has student loan debt with $127k outstanding, we have 2 Vanguard 529s with a balance of $91k in each, we max our 401k(s) and our Vanguard ROTHs, and have a Vanguard taxable account approx $1m. I bring up these details b/c I have been trying to determine how much life insurance ea. of us need. I have used some online calculators, and depending on my input, some of the conclusions have been I don't need life insurance due to our portfolio size; but again, if certain criteria is left out, life insurance is recommended. I would be looking for a term somewhere at either 20, 25, or 30 years. Despite having this large portfolio, in some regards, I have thought that it would be better to get a policy b/c I would want to preserve our portfolio for our boys so that the life insurance policy could be used in conjunction with it. I have tossed around the idea of getting a $500k or $750k policy for me, and a $500k policy for my wife. Opinions?

Also, what is the lowest company rating you would accept?

Tx for any help with this.

B
bbrock
ralph124cf
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Re: Term life questions

Post by ralph124cf »

To make meaningful recommendations, we would need more information, such as your ages and projected expenses.

If you died, that $1M would only reliably allow about $40K per year in spending.

You and your wife probably need life insurance.

Possibly more important, you need disability insurance. If not in a dangerous job or with a know medical condition, disability is more likely than death before age 50. If you are a high income professional, make sure that the disability insurance specifies "own occupation".

Ralph
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bbrock
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Re: Term life questions

Post by bbrock »

I'm 39, wife 38.

I would use CA St. disability insurance, and my wife would use DI through Calpers, as she is employed for the State.
bbrock
Texas hold em71
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Re: Term life questions

Post by Texas hold em71 »

If you were to die tomorrow, it seems to me college is covered but that is really a call you have to make based on expectations for your toddlers. I personally would want to leave enough behind that my spouse could pay off all debt (whether she did or not- she could). We don't know what is in your 401(k) that she could combine to generate income replacement for you. She would need to save for her own retirement, buy her own replacement vehicles, etc. Depending on your beliefs, she will have cars to buy in the future for your children. We also took into account things like extra help that would be needed around the house in the event one of us passed. It depends on how financially independent you want to leave your family upon your death. That is very personal.

If it were me, I would take advantage of the relatively low rate you will get for being under 40 and in good health. I would get the 20 year term since that covers her until the children are almost out of undergrad. I think you will find that the price difference between 500,000 and 750,000 is relatively low. I doubt very much you will find it prohibitively expensive but if you decide you don't want it, you can always cancel the policy.

Can't really say on the rating- I am very conservative on that type of thing.
Texas hold em71
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Re: Term life questions

Post by Texas hold em71 »

I should not forget to remind you to factor in your social security survivor benefits. Your online statement will show you the maximum amount your spouse will receive and the kids will receive until they turn 18. That is built in insurance that you can discount as much or as little as you like over the 20 year time horizon. Many people overlook this.
Lafder
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Re: Term life questions

Post by Lafder »

As a rough estimate of how much life insurance to pay for, I would say enough to pay off mortgage, student loans, plus a few years salary so the remaining spouse can take a few years to get themselves together before needing to work full time. Especially considering that you have large savings already.

I do not consider life insurance as needing to be an amount that the remaining spouse would never have to work again.

It is also important to consider that there is a chance both parents could die at the same time, leaving the life insurance to their kids or estate. So be sure you have all estate planning in place in case the unthinkable happens. Especially since you have minor children that need guardians named as well as a possible trust with trustees if both parents are gone.

I have no idea on insurance ratings. We have had ours over 10 years. I did not shop around, I just went with who my home/car insurance agent recommended out of their office. I did check again more recently, but we can't beat the original rates due to our current ages.

lafder
EnjoyIt
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Re: Term life questions

Post by EnjoyIt »

Simple math answer

[(living expenses) - (retirement assets * 4%) - (social security yearly survivor benefits) - (spousal yearly income)] x 25

Your term should be for as many years that number above is valid. Looking at where you are at, a 10 year term could be enough. You can also buy 2 smaller term insurances, a 10 year and a 20 year.

example for His term life:
Living expenses $150K/year which includes retirement savings for Her
retirement assets 1 million
social security survivor benefits $18K
Her income $80K

[$150K-(1 million *4%)-18K-$80K] x 25 = 300K term life insurance. Very likely for no more than 10 years which you should cancel probably sooner.

Do the same math for her
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BruDude
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Re: Term life questions

Post by BruDude »

bbrock wrote:I'm 39, wife 38.

I would use CA St. disability insurance, and my wife would use DI through Calpers, as she is employed for the State.
I wouldn't rely on the CA state DI, it only provides benefits for a maximum of one year.

http://www.edd.ca.gov/Disability/FAQ_DI_Benefits.htm

The benefits of an individual DI policy will be far better than the CA state policy. You probably need that a lot more than life insurance right now, if you had to choose one or the other.
Laura
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Re: Term life questions

Post by Laura »

Yes, if you lose your job you lose your disability insurance. Sadly these can often happen right at the same time. It is much better to have your own outside of your job. You and your wife both need this more than life insurance. I would elect a smaller amount of life insurance and add disability insurance rather than going with the larger life insurance policy.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
jchris
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Re: Term life questions

Post by jchris »

I think your general plan - 500K on each parent, 20 year term, is pretty good. Actually you probably don't need that much, since your portfolio is already very large for your age. You could probably do half that amount. I don't see why you would need a policy longer than 20 years. Your kids will be almost 22 when the policy expires, pretty much through college. My wife and I basically had the same plan - enough term life insurance to take care of their expenses and get them through college. We figured our portfolio would be big enough by that point that life insurance will no longer make sense, and that looks to be correct (our kids are now 13 and 16 and our portfolio is low 7 figures). I don't know about the rating question. We have our insurance through USAA. It is actually quite inexpensive.
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gardemanger
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Re: Term life questions

Post by gardemanger »

BruDude wrote:
bbrock wrote:I'm 39, wife 38.

I would use CA St. disability insurance, and my wife would use DI through Calpers, as she is employed for the State.
I wouldn't rely on the CA state DI, it only provides benefits for a maximum of one year.

http://www.edd.ca.gov/Disability/FAQ_DI_Benefits.htm

The benefits of an individual DI policy will be far better than the CA state policy. You probably need that a lot more than life insurance right now, if you had to choose one or the other.
The CA state disability coverage is excellent, and remarkably efficient (I got benefits within less than a month of applying) but it is only for a maximum of one year. If you become disabled during your working life, it could be for a period of many years, or lifelong. You need "own occupation" private disability insurance.
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nisiprius
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Re: Term life questions

Post by nisiprius »

bbrock wrote:...Also, what is the lowest company rating you would accept?...
Something like 2/3 of all insurance companies get financial strength ratings in the "A" range, and most that have an "A" from any of them will have an "A" from all four of the NRSROs (Nationally Recognized Statistical Ratings Agencies). Life is too short to even think about a company that doesn't have at least an "A" rating from all four of the NRSRO's when there are so many companies that do. (The four agencies are: A. M. Best, Fitch, Moody's, S&P). Usually the company's own website will provide them. If it does not show ratings from all four, move on--not because there's anything wrong necessarily but because there are so many, many companies that do, so why waste time wondering why this one doesn't?

I would also take the time to familiarize yourself with your state guaranty association and the limited "safety net" that it provides. Start at
http://www.nolhga.com
Find the link to the list of State Associations, click, choose your state from the dropdown menu, press "Go," find "Frequently Asked Questions," and read it from beginning to end.
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Grt2bOutdoors
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Re: Term life questions

Post by Grt2bOutdoors »

On the question of rating, the lowest rating I would find acceptable would be A-. The real issue with ratings are they can change over time, so for instance, a company rated A- today, could theoretically improve to an A or deteriorate to a BBB+ rating. The same could be said of a company currently rated A+, they might find their rating downgraded over the years in which you hold your policy to say an A or A- rating. The end result would still be the same, the claims paying ability for companies rated A+,A or A- would still be excellent, the risk of default would be low and you would still be fine.

On the other hand, I would not accept an issuer rating that was in the BBB range, those companies would likely offer better than average policy costs (lower costs) to attract more premiums, they'd also attract the insurance regulators to them as well and while their ratings could improve over time, the likelihood would be they have a better chance of degrading in their rating than in improvement. So, I'd steer clear of those companies.
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BruDude
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Re: Term life questions

Post by BruDude »

Almost every company listed on Term4sale has an A or A+ financial rating from AM Best. No reason to choose a company with less than an A rating unless there are special circumstances (usually relating to underwriting/health history).
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bbrock
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Re: Term life questions

Post by bbrock »

Tx for all the great info & replies.

Some questions/points. We just had open enrollment for both of our works. We didn't elect LTD insurance coverage through our employer. It seems as though, and from something I just read at Fool.com, that going that route would offer the least expensive avenue to get LTD coverage. Sounds like private policies are pricey. I really have not given a lot of thought above DI vs. term life, but it does make sense. I didn't know the limitations of CA SDI. I rather assumed that even if it either of us became severely disabled, we would be able to turn to SSI for coverage. But, I again assume the coverage would not be the best through SSI.

Also, I am at Term4Sale right now. When I am using the Health Analyzer function, it asks for info re: driving. One question is if the applicant has ever had an accident. Does that include as a minor? I assume that your record as a minor (<18) is not applicable. Anyone know?

And, BruDude, I saw another post of yours in which you mention that Guardian is the go to company for seeking private DI. Is is still that way? I am not sure what we would be looking at cost wise vs. just waiting until open enrollment.
bbrock
dhodson
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Re: Term life questions

Post by dhodson »

Group polices are much weaker than individual and that's why they cost less
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obgyn65
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Re: Term life questions

Post by obgyn65 »

I bought a 20-year life insurance policy a few months ago for about $3mm. Got it through term4life. For some reason I followed my adviser's advice re: company ratings.
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bbrock
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Re: Term life questions

Post by bbrock »

Despite LTD policies being weaker than private policies, expected higher premiums w/ private policies, and since we will also have the premiums of life insurance policies, it seems as though it would be smarter from a monthly budget perspective to get a group policies, despite their shortcomings. We would have to wait until next year's open enrollment if we went through our workplaces.

Why not just deal with the group policies? I'm not sure I have heard a convincing enough reason to justify the higher costs w/ a private LTD policy.
bbrock
Laura
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Re: Term life questions

Post by Laura »

Can you keep the policy acquired through your employer if you leave that job? Later it may be more difficult or more expensive to lock in disability insurance so doing it privately is often the best option.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
bbrock
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Re: Term life questions

Post by bbrock »

Good point Laura, but even if a person leaves one company, there is always the possibility of getting a group LTD policy through his/her next employer. The one thing I am curious about though is what happens if an employee, who has a group LTD policy, becomes severely incapacitated and can't perform his/her job. I assume the group policy will pay out, but I wonder for how long; I guess it is as long as you have your employment. If that is the case, why then, would anyone purchase a group LTD policy? It seems risky as it is tied to your position (as you had stated earlier Laura).
bbrock
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bbrock
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Re: Term life questions

Post by bbrock »

I searched at Term4sale.com and have been in contact with an agent. I have discussed a couple of different options. Perhaps going with a 30 yr $300k term policy, and a 20 yr $200k policy. He seems to be trying to talk me out of splitting policies of course. I just want to control premiums a little better. I was originally considering a 20 yr policy, but have now thought that when I'm 59, the boys would be off to college and I would still be working. We would still have expenses, but with regards to our only debt, my wife's student loans will have been paid off, and the mortgage will be significantly less. Therefore, that is why I'm thinking of splitting policies and also going for 30 b/c now is the time/age to do it at. The agent is saying that I could always drop it later or reduce the coverage amount, just not increase it. Any insight on this?

I don't have the option for group disability through my hospital as this is only a benefit for full time RNs. I am contracted at part time (24 hr/wk) but always pickup and work an extra shift ea. wk so I am at 32 hr/wk. So, despite working full time status, I can't sign up b/c that is not what is on record. Therefore, I asked my agent about LTDI (I just finally read the wiki on LTDI). Whatever the case, LTDI is expensive... yikes. But, I do see the benefit in having it. He was stating that he could find a better priced LTDI policy at approx $125/mo premium for a $4k mo. benefit (tax free) for a own-occupation plan with a 90 day wait, but the catch, it is not guaranteed. I stated that would be risky then, and he responded that he has never (over 40 yr as an ins. agent) seen rates go up. Where we are at rt now is that he is looking more into this policy. I emailed him and included the "Need to have" and "Nice to have" bullet points from the DI Wiki page, and also informed him that I would want a 180 wait (to reduce premiums) and coverage at 60-65% of my income (stated $100k/yr for simplicity even though it get slightly more). Unfortunately, I don't know enough about the policy/plan at this time to address the other bullet points from the Wiki DI page. I wanted to know what you all think. If it is a guaranteed policy, I am assuming I could expect to pay double in premiums, which I don't really want to do. I had the following questions with regards to DI:

1. On the above quote, a $4k/mo payout would be $48k/yr, which would be equivalent to approx. $77k/yr taxable income. That would be coverage equal to 77% of my income. I assume the coverage amount is something I could choose, correct?
2. Is it generally advisable to replace 60-65% of taxable income? With our assets as listed in the beginning of the thread, do I need 60-65% coverage?
3. To save on premiums, could a non-guaranteed policy be worth it?
4. If I did sign up for a non-guaranteed policy, what would warrant a rate increase?

Tx for any and all help with this.
bbrock
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bbrock
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Re: Term life questions

Post by bbrock »

Sorry, any input?
bbrock
dhodson
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Re: Term life questions

Post by dhodson »

I personally just would stick with 20 year term if I were you. (I'm not in the insurance field). Not only would your costs be less as you noted but your retirement (that you wont be using if dead) could be used by your wife.

You might want to go to whitecoatinvestor.com and read the posts on disability insurance. I personally wouldn't be worried about that particular guarantee. As noted, it appears to be very rare that rates go up.
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bbrock
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Re: Term life questions

Post by bbrock »

Dhodson, great point about the retirement being able to be used. I think actually overlooked that.

Also, good tip to look at whitecoat investors. I have gone there and used that site for various things from 529 info to student loan debt. i'll look there what they have to say about disability insurance.

The agent got back to me yesterday and gave me some quotes. It looks like they are all own occupation except maybe one that is a modified own occupation, and they're all guaranteed noncancelable, except one that is non-guaranteed. Whatever the case, the premiums are unbelievable. I just don't think that I want to spend that. The cheapest plan is the nonguaranteed with a premium at $271 a month. It is a modified own occupation, with the premium guaranteed for three years. The guaranteed policy premium would be $341 a month, with true own occupation. I went with 180 day elimination., But I think I'm going to have the agent give me a quote for a one year waiting period as our portfolio could always be my emergency reserve, not to mention we already have cash reserves set aside for at least six months if not more.
bbrock
ralph124cf
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Re: Term life questions

Post by ralph124cf »

With respect to long term disability insurance, the insurance company is generally unwilling to sell you insurance for more than 60-65% of of your income. They have this limit to try to reduce "moral risk", they don't want it to be too tempting to claim an illness or injury so that you can retire on their dime.

The insurance is expensive because the insurance company is taking on significant risk, and has regular payouts from this business. The insurer is not going to accept a loss on the policies, and a lifetime disability of a younger worker would mean a forty year payout.

I agree that a one year elimination period would be worthwhile to reduce premiums as long as you can afford it.

Ralph
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bbrock
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Re: Term life questions

Post by bbrock »

Let's try this again. Computer froze, & lost my work.

After a 5 mo., I am ready to move fwd on finalizing a term life policy I was approved for as found through Term4Sale.com. I was approved for $750k 20yr term, super preferred rate class, premium $530, 40 yr old male. I will probably change the face amount to $1mil w/ a premium of $685. The policy is offered by Pacific Life. A+ rating via Term4Sale.com.

I am re-considering the term period. Could it be worthwhile to consider 30 yr vs. 20 yr. (25 yr. term had less providers offering it and rate was not much better than going for 30 yr.)? FWIW in helping you offer a suggestion on either 20 vs. 30 yr term, here are some details. I'm 40, wife 39, twins 2 yrs, debt: student loans $57k @ 1.61% and $43k @ 3.625%, and mortgage $294k @ 4.125%, investment worth $1.5 mil. Here are our plans: w/in 5 yr payoff student loans, hopefully by 20 yr payoff mortgage. In 20 yr I'll be 60 and most likely still working, as will my wife. The twins would be 22 and hopefully graduated by college at that time. Not really sure if the extra 10 yr w/ a 30 yr term is needed, but I've been re-considering it for peace of mind. Mostly b/c often times kids are not life ready/work ready by the end of college, which in this example our twins would be 22.

FWIW, I am also shopping for private DI so that base is being covered as well. So, again, would you all recommend the 20 or 30 yr.?
bbrock
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Matahari
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Re: Term life questions

Post by Matahari »

I would choose 30-year term and re-evaluate at 20 years. You may feel comfortable dropping the coverage at that time and the annual fixed premium will likely not be material then to your financial condition.

But, if you decide you need to extend coverage past 20 years (because your kids are attending expensive graduate schools, etc.), it will be prohibitively expensive for a 60-year-old to obtain insurance and you'll have to pass an insurability test. I'd think of getting the 30-year-term as "insurance" against uninsurability.
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bbrock
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Re: Term life questions

Post by bbrock »

Tx for your comment Matahari. I played the odds and chose the 20 year. I am banking on portfolio growth over the 20 years and saving/investing. Other factors that swayed my decision are that I will also soon be getting a private disability insurance (DI) policy, and those premiums could be crazy. As such, I would rather get more DI vs. a longer term life.
bbrock
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