Term Life: How Much & Term Length Guidance

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
ronin
Posts: 35
Joined: Wed Apr 22, 2009 9:17 pm

Term Life: How Much & Term Length Guidance

Post by ronin » Mon Mar 23, 2015 11:55 pm

Fellow Bogleheads,

My wife and I decided we need to get Term life on me and likely on her eventually. First a bit about us. I'm 42, she's 40, we have a 10 month old and another one expected this October. I work FT (about $90k/yr) and she works PT ($30k/yr). We have mid six figures in retirement savings and the only debt is a mortgage ($130k) on a 15-year loan (about 12 years remaining). I'm in good health, never smoked, etc.

We are not sure we necessarily want to fully fund college for both kids from a policy, but some amount towards such seems appropriate. We would want the mortgage, funeral expenses, and lost income addressed, however.

Questions:

1 - I've read that when calculating lost income/income need, I should only factor in about 50-60% of my pre-tax amount and not the entire amount. I'm not clear on why this would be other than that some of my income goes to paying the mortgage which would already be specifically allowed for. Any other reasons for this approach, or is this not how I should be calculating this?

2 - Any other guidance on the appropriate amount or considerations for determining such?

3 - I'd likely get a 20 year term, though this doesn't allow for making it through the full college years for the kids. Some companies offer 25 year term, but most jump to 30 years, which seems like I'm over buying the length at that point. Any thoughts on this aspect? I figure I won't likely want to startup a policy at the end of this one given the costs will likely price me out due to age at that point.

4 - In terms of budgeting, is it unwise to trade up/down the dollar value versus length (term)? Between the two variables is one more important to be more conservative with?

Thanks in advance for any thoughts on some or all of the questions posed above.

whomever
Posts: 701
Joined: Sat Apr 21, 2012 5:21 pm

Re: Term Life: How Much & Term Length Guidance

Post by whomever » Tue Mar 24, 2015 5:51 am

One thing to remember is inflation; if you need 100K of today's dollars in 20 years, at 3% inflation you need a $180K policy.

Of course, you could add a 10 year policy in ten years, if you're still insurable.


"2 - Any other guidance on the appropriate amount or considerations for determining such?"

My personal, highly unscientific method was to imagine myself on my untimely deathbed and picking an amount where I could think "well, at least she won't have to worry about money". But that peace of mind isn't free; the kids need shoes now as well. It's a personal tradeoff, I think.

"though this doesn't allow for making it through the full college years for the kids."

You can get the 30 year and cancel the day after graduation (or not, if grad school is involved, or one becomes disabled, or ...). Depending on the relative prices, of course.

(I have always wondered why you can't get more customized insurance: 'I want it to pay $75K for the first 7 years, then $100K for the next 11, then $50K for another 6 years'. You'd think the insurance company's computer could price that like any other policy)

Grt2bOutdoors
Posts: 17461
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Term Life: How Much & Term Length Guidance

Post by Grt2bOutdoors » Tue Mar 24, 2015 7:47 am

ronin wrote:Fellow Bogleheads,

My wife and I decided we need to get Term life on me and likely on her eventually. First a bit about us. I'm 42, she's 40, we have a 10 month old and another one expected this October. I work FT (about $90k/yr) and she works PT ($30k/yr). We have mid six figures in retirement savings and the only debt is a mortgage ($130k) on a 15-year loan (about 12 years remaining). I'm in good health, never smoked, etc.

We are not sure we necessarily want to fully fund college for both kids from a policy, but some amount towards such seems appropriate. We would want the mortgage, funeral expenses, and lost income addressed, however.

Questions:

1 - I've read that when calculating lost income/income need, I should only factor in about 50-60% of my pre-tax amount and not the entire amount. I'm not clear on why this would be other than that some of my income goes to paying the mortgage which would already be specifically allowed for. Any other reasons for this approach, or is this not how I should be calculating this?
You currently gross $120K per year, after-tax you likely come home with say $90K, a good rule of thumb is to insure your self for 10-15x after-tax income. Why after-tax? Well, life insurance benefits are usually income tax free, but depending on what state you reside in, maybe subject to an estate tax. Assuming the benefits are tax-free for a moment, then your actual needs are not based on gross income but on 10-15x your net income less any assets you may have if you choose to use them for calculation purposes or if you intend to leave a legacy then don't include it.
2 - Any other guidance on the appropriate amount or considerations for determining such?
Given your situation, a minimum of the following and this takes into account Social Security death benefits your minor children and spouse will receive in the event of your untimely departure and vice versa for your wife - $130K for the mortgage plus $200K for collegiate/trade school expenses (at 50% of anticipated cost 18 years from now - I might be off but am certainly not above the future price) plus 650K - let's call it $750K minimum to $1MM for 20 years of term payable to your spouse and for your wife payable to you since she provides certain benefits to your family besides her income (daycare is not cheap!) $500K payable to you.
3 - I'd likely get a 20 year term, though this doesn't allow for making it through the full college years for the kids. Some companies offer 25 year term, but most jump to 30 years, which seems like I'm over buying the length at that point. Any thoughts on this aspect? I figure I won't likely want to startup a policy at the end of this one given the costs will likely price me out due to age at that point.
Obtain a policy that covers the term of your expected obligations that could not otherwise be paid for without either a)earned income or b)life insurance policy. If your spouse will continue at current salary for anticipated future going forwards, you'd want the policy to cover at least 20 years, the next biggest expense after your home mortgage will be college.
4 - In terms of budgeting, is it unwise to trade up/down the dollar value versus length (term)? Between the two variables is one more important to be more conservative with?It's easiest to obtain a life insurance policy when you are healthy, it's much more expensive or even unobtainable when your health deteriorates. You'd like to think you will be healthy forever, but things can change on a dime. So, if you go out longer - say 30 years, you will pay more than a 20 year but you will have coverage for as long as you continue to pay the premiums. If you decide or have the means to drop the policy at a future point after 20 years (for an original 25 or 30 year term) because you have hit your "number", your ship has come in, you hit the lottery, etc. you can do that do to. Check out http://www.term4sale.com, for a comparison between the cost for 20 year vs. 30 year policies.

Thanks in advance for any thoughts on some or all of the questions posed above.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

jimishooch
Posts: 174
Joined: Tue Nov 11, 2014 2:28 pm

Re: Term Life: How Much & Term Length Guidance

Post by jimishooch » Tue Mar 24, 2015 2:56 pm

the problem for me and my wife was not how much but for how long,

so I used our full retirement age as a guide...

good luck
jim

EHEngineer
Posts: 657
Joined: Sat Feb 28, 2015 4:35 pm

Re: Term Life: How Much & Term Length Guidance

Post by EHEngineer » Tue Mar 24, 2015 4:34 pm

The way I calculated life insurance is the gap between the portfolio you have an the portfolio she would need without your income.

To calculate the life insurance benefit she would need:
1)State required after-tax income = current monthly budget and mid-term goal savings = RATI (Required after tax income)
2)required pre-tax income (RPTI) = RATI/(1-effective tax rate) [20% or 25% effective tax rate is probably safe].
3)Define a safe withdrawal rate (SWR). Note: ANNUAL. Given that you have 40-50 years, 4% is probably too high. 2% is very safe. Try 2.5 or 3%.
4)Required portfolio size (RPS) = RPTI*12/SWR
5)Required life insurance = RPS MINUS current retirement portfolio value.
6)Add the cost of any other things you may want to insure for, eg kid college costs.

You can see that if you add extra insurance to, say, pay off your mortgage, then the RATI (Required after tax income) would go down because no principle or interest payments would be included in the monthly budget.

A keen observer will notice that as years pass and your portfolio grows you will need less insurance. Because of that I purchased insurance in 4 parts, 10, 15, 20 and 25 year policies, so that I don't have to pay for a single 25 year policy. Also note that inflation will reduce the "real" value of the policies, particularly the longer term ones. You may want to over size those somewhat depending on how conservative you want to be.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

mikep
Posts: 3665
Joined: Wed Apr 22, 2009 9:27 pm

Re: Term Life: How Much & Term Length Guidance

Post by mikep » Tue Mar 24, 2015 7:06 pm

Subtract FICA taxes from your current income. Also factor in SS survivor benefits into your death benefit calculation.

EHEngineer
Posts: 657
Joined: Sat Feb 28, 2015 4:35 pm

Re: Term Life: How Much & Term Length Guidance

Post by EHEngineer » Tue Mar 24, 2015 7:20 pm

mikep wrote:Subtract FICA taxes from your current income. Also factor in SS survivor benefits into your death benefit calculation.

FICA taxes would be included in the effective tax rate. I proposed 20-25%, but you can make your own judgement about what you think will be your effective rate during the remainder of your years.

I don't include social security in my own planning because I expect it won't be there for me. You can make your own judgement if you want to include it or not.

For anyone wanting to comment about the likelihood or reasons that I'm right or wrong, don't. Just make your own choices for your planning; no need to explain them.
Last edited by EHEngineer on Tue Mar 24, 2015 7:45 pm, edited 1 time in total.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

bloom2708
Posts: 3094
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Term Life: How Much & Term Length Guidance

Post by bloom2708 » Tue Mar 24, 2015 7:26 pm

We did a 3 policy ladder for each of us.

A 10, 20 and 30 year term policy each for $250k. The 30 year takes us to 68. As our assets increase our needs should hopefully decrease.

We each have insurance through work, but that goes away if our jobs go away, so I feel this is "enough" based on our current savings.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

terran
Posts: 578
Joined: Sat Jan 10, 2015 10:50 pm

Re: Term Life: How Much & Term Length Guidance

Post by terran » Tue Mar 24, 2015 9:52 pm

whomever wrote:One thing to remember is inflation; if you need 100K of today's dollars in 20 years, at 3% inflation you need a $180K policy.


To my thinking, as long as you're continuing to save this will more than make up for the value the policy loses to inflation. This actually works out quite well since when you need the most money if something were to happen (now) the policy is worth the most, and if something were to happen in 19 years you just need a little boost to add to what you had been saving anyway to get the surviving spouse over the finish line to a fully funded retirement.

ronin
Posts: 35
Joined: Wed Apr 22, 2009 9:17 pm

Re: Term Life: How Much & Term Length Guidance

Post by ronin » Tue Mar 24, 2015 10:36 pm

Thank you all for taking time to share your thoughts and ideas. Many good points to consider.

I am a bit curious about the laddering concept where some have taken out multiple policies lasting different lengths in time. I've heard of this for CDs, but want to better understand how this approach benefits (potentially) the term life shopper? Would one purchase equal or varying dollar amounts across the terms?

Cheers!

angelescrest
Posts: 893
Joined: Tue May 27, 2008 10:48 am
Location: The Third Coast

Re: Term Life: How Much & Term Length Guidance

Post by angelescrest » Wed Mar 25, 2015 8:29 pm

whomever wrote:(I have always wondered why you can't get more customized insurance: 'I want it to pay $75K for the first 7 years, then $100K for the next 11, then $50K for another 6 years'. You'd think the insurance company's computer could price that like any other policy)

Have you not thought about laddering?

User avatar
powermega
Posts: 1131
Joined: Fri May 16, 2014 12:07 am
Location: Colorado

Re: Term Life: How Much & Term Length Guidance

Post by powermega » Wed Mar 25, 2015 9:17 pm

The only problem with buying multiple policies is that most policies have a flat fee associated with them, so that if you buy two or three policies, you end up paying two or three flat policy fees. Also, carriers will price out the cost of insurance rates less for higher face amounts. In other words, even assuming the flat policy fee I just mentioned was zero, the sum of premiums for two $250k policies is more than one $500k policy. Term policies are sold as having a level face amount and premium for a certain duration. After that duration, the policy will revert to an "annual renewable term policy", which is like having a term policy where the term duration is one year. Because of the rising cost of insurance as you get older, that means that the same face amount will cost you more each year. Most insurance companies will allow you to schedule a decrease in the face amount after the term duration is over though. Say you bought a $1M 20 year term policy. After 20 years, you can request that the face amount be reduced to $250k (or whatever your need is at that time), and you could continue to pay a premium every year for that reduced amount. Another alternative is the Custom Choice UL policy from Protective Life. It is a UL policy in name only since it is priced and structured to look like a term policy. The premiums (at least in my case) were cheaper than almost any term policy I could find, and it has the nice feature of automatically adjusting your face down every year after the level term period, keeping your premium level. I just went through the insurance shopping experience myself, and that is the policy my wife and I are getting.
Even a stopped clock is right twice a day.

michaelsieg
Posts: 534
Joined: Mon Jan 07, 2013 11:02 am

Re: Term Life: How Much & Term Length Guidance

Post by michaelsieg » Wed Mar 25, 2015 11:03 pm

I am a bit curious about the laddering concept where some have taken out multiple policies lasting different lengths in time.

We did that too, I took a 10 year, a 15 year and a 20 year policy. I projected our savings rate and felt that in the future, when savings have grown, the "shortfall" that the insurance would have to cover would decrease.
In terms of the amount to cover, we have 3 kids and I used college costs, the remaining mortgage balance and living expenses to estimate the coverage needed, assuming my wife would not work until the youngest is in first grade, she could pay off the mortgage, and that she would work part - time (50%) until the kids leave for college.
After running the numbers, the amount needed to cover this was higher than I expected.

wfrobinette
Posts: 547
Joined: Fri Feb 20, 2015 3:14 pm

Re: Term Life: How Much & Term Length Guidance

Post by wfrobinette » Thu Mar 26, 2015 9:56 am

Don't forget to take care of a will and such to cover the case if you and the wife die at the same time.

For me, I had my only child at 35. I promptly got a 10 year policy. Since then I have obtained 2 twenty year policies that covers 15x of my income plus I have my 1x at work. I'll be covered to 62 which should be sufficient.

My thoughts were to leave my wife enough to maintain the same standard of living while I was alive and pay 100% of my child's schooling.

mmmodem
Posts: 1117
Joined: Thu May 20, 2010 1:22 pm

Re: Term Life: How Much & Term Length Guidance

Post by mmmodem » Thu Mar 26, 2015 10:29 am

We went with a 20 year term after the birth of our first child. The amount will allow one of us to take care of our children without having to work until they are adults and off to college. Past 20 years and our savings will exceed the insurance payout and allow us to self insure. I don't use the rule of thumbs for amount because there is no expectation that either of us will live off this money forever. It is the hope that if one of us passes away between ages 30 and 50, the other will remarry and continue on living and working a normal life.

Miguelito
Posts: 145
Joined: Thu Feb 27, 2014 1:21 pm

Re: Term Life: How Much & Term Length Guidance

Post by Miguelito » Thu Mar 26, 2015 11:02 am

We have policies to cover us until our children are out of college. When we got them, they were enough to pay off our house, pay for the remainder of full-time daycare years, and pay for college.

My wife and I both have good enough jobs that with those items taken care of, the family could mostly maintain the standard of living on the other's salary.

The inflation part wasn't a factor because as years go by, less expenses remain. For example, both kids are out of daycare, so that's 120k we no longer have to worry about. Also, we have a 15 year mortgage, so principal goes down quickly. With ~5 years to go on the policy, all that will be left to worry about is college, and the policy will easily cover that.

Our policies cover us until our late 50's. I'm not about to pay for insurance for anything more than is needed. We're not looking for a jackpot when one of us dies. We fully expect to live past 80, so what's the point in paying more to be covered beyond critical expenses. If one of us dies when the kids are out of college, the other should have a nice house paid for, a comfortable retirement paid for, some money put aside, and a good profession to hopefully still be employed in if desired.

whomever
Posts: 701
Joined: Sat Apr 21, 2012 5:21 pm

Re: Term Life: How Much & Term Length Guidance

Post by whomever » Thu Mar 26, 2015 12:09 pm

"Have you not thought about laddering?"

I don't think you get quite the same effect.

For example, my wife and I have similar social security PIA's. This means that the worst case is that I die at my 70th birthday party. If I die at 62, she can collect spousal from 62 until 70 (when she could collect her own benefit). If I die a long time after 70, we get my benefit during that time. If I want to use life insurance to replace what SS would have been in the event of my untimely death, I'd want the policy to stair step up from 62 to 70, then stair step down.

You can ladder policies to stairstep down, but I don't think you can get the effect of stairstepping up w/o new medical underwriting as you buy each new policy.

(At age 57, I got a 20 year level term policy that will be breakeven if I die at 70, and leaves me overinsured at 62 and 77. But that's less efficient. I know, I'm being picky about efficiency; it's an occupational hazard for engineers :-) )

Post Reply