How Much Life Insurance Should we Buy?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
mybogledhead
Posts: 34
Joined: Wed Feb 04, 2015 10:25 pm

How Much Life Insurance Should we Buy?

Postby mybogledhead » Fri Oct 14, 2016 12:55 pm

Hello,
Right now my wife and I each have $500K of 5yr term insurance that was sold to us when we were in school. It costs about $70/mo. Our incomes have grown tremendously since then, but we continue to carry student loan debt. We are expecting our first child this month and need to update our life insurance.

We both just turned 35.

Her Salary: $250,000
His Salary: $190,000

Retirement Savings: $300K
Emergency Fund: 4-6 months expenses

Her debt: $125K in federal student loans that will be paid off by her empoyer if she stays four more years (planning to stay much longer).
His Debt: $92K consolidation loan at 2.5% fixed (Paying extra each month to have it paid off in next 48 months), $70K five year variable at 2.24% (48 months left).
Mortgage: None now, but maybe in the next 1-2 years.
No credit or automobile debt

I have heard the rule of thumb that you should buy 10x your salary in life insurance, but I'm wondering if we need that much. We both have stable income and would be able to live comfortably without the other's salary. I was thinking maybe $1.5M of 20 or 25 year level term life insurance for each of us would be enough to pay off loans, future mortgage, and provide savings for kids and retirement in the event one of us passes away.

Thoughts or suggestions?

Grt2bOutdoors
Posts: 15640
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: How Much Life Insurance Should we Buy?

Postby Grt2bOutdoors » Fri Oct 14, 2016 12:58 pm

Do you have a will?
Don't forget, if you have a child and one of the parents passes, the child and the surviving spouse will be entitled to Social Security survivor benefits.
"Luck is not a strategy" Asking Portfolio Questions

Dude5568
Posts: 3
Joined: Thu Apr 28, 2016 2:46 pm

Re: How Much Life Insurance Should we Buy?

Postby Dude5568 » Sun Oct 16, 2016 5:14 pm

Congratulations on great incomes. I strongly suspect your wife is a Physician. Maybe you too.

Me and my wife just got our Term Life insurances for 20 years each.

Me - 3 million , her - 2.5 million . Costs us 180 $ per month combined . Mine is with Mutual of Omaha and her's is with Prudential. We are both physicians with incomes of 250k each. Both turned 31 ( me ) and 28 ( wifey ) respectively this year recently.

We are both quite healthy although I am about 25 pounds overweight with everything that comes with it. :(

Boglegrappler
Posts: 844
Joined: Wed Aug 01, 2012 9:24 am

Re: How Much Life Insurance Should we Buy?

Postby Boglegrappler » Sun Oct 16, 2016 5:35 pm

Start by imagining that one of you dies just after your first child is born (sorry, unpleasant, but that's why life insurance exists). The surviving parent will have to replace the income (at least in part) and services provided by the deceased parent. It will be necessary to do that until your child is self supporting. As others have noted, social security currently helps out.

More important for first time parents, I think, once you have the insurance part set up, is to have your will structured to take care of the situation where you both die in an accident when your child is young. Pencil out the assets available to your child from the insurance proceeds, and think about whom you wish to raise your child and be the guardian. Figure out how to handle the situation where your selected guardian might see the child as a mini-millionaire, which can easily happen in the even that you're properly insured and you have the common disaster. Its a bit tricky.

I suppose a simple, baseline way to think about it, is for each part to have enough insurance to cover the income/services deficit until the child is 18, or possibly 21. Its a little like the "how much do I need to retire?", which requires you to estimate how long you'll live. In the case of life insurance, and assuming a spouse able to work, you don't have as much uncertainty about how long you need to cover the "shortfall".

SleepKing
Posts: 203
Joined: Mon Mar 02, 2015 8:45 am

Re: How Much Life Insurance Should we Buy?

Postby SleepKing » Sun Oct 16, 2016 6:16 pm

One thought some people do is a 'Term ladder'. For example:

30 year policy at 500k
20 year policy at 750k
15 year policy at 1 mil
10 year policy at 1mil

They do this ASSUMING, they will pay down non-forgivable upon death debts and be able to accumulate their desired amount of monies in retirement, taxable, or 529/college savings. When each 'rung'' expires, their premiums obviously drop and they (can use that money to invest, etc...

As for the total amount you and the wife need, there are many tools to help you get an estimate. I would recommend err on the side of TOO MUCH insurance, rather than too little. At you age, health, and income level, large term policies will likely be very reasonable.

As for 'living comfortably if other dies', consider if you would need a full time nanny/child care. That ain't cheap.

Most important, you are MUCH more likely to become permanently/significantly disabled than killed. Make sure you have disability insurance if you can get it for your profession.

Best,
Sleepy

Valuethinker
Posts: 30953
Joined: Fri May 11, 2007 11:07 am

Re: How Much Life Insurance Should we Buy?

Postby Valuethinker » Mon Oct 17, 2016 6:37 am

mybogledhead wrote:Hello,
Right now my wife and I each have $500K of 5yr term insurance that was sold to us when we were in school. It costs about $70/mo. Our incomes have grown tremendously since then, but we continue to carry student loan debt. We are expecting our first child this month and need to update our life insurance.

We both just turned 35.

Her Salary: $250,000
His Salary: $190,000

Retirement Savings: $300K
Emergency Fund: 4-6 months expenses

Her debt: $125K in federal student loans that will be paid off by her empoyer if she stays four more years (planning to stay much longer).
His Debt: $92K consolidation loan at 2.5% fixed (Paying extra each month to have it paid off in next 48 months), $70K five year variable at 2.24% (48 months left).
Mortgage: None now, but maybe in the next 1-2 years.
No credit or automobile debt

I have heard the rule of thumb that you should buy 10x your salary in life insurance, but I'm wondering if we need that much. We both have stable income and would be able to live comfortably without the other's salary. I was thinking maybe $1.5M of 20 or 25 year level term life insurance for each of us would be enough to pay off loans, future mortgage, and provide savings for kids and retirement in the event one of us passes away.

Thoughts or suggestions?



There are "need" calculators out there and you need to run one. THere's no rule of thumb that can displace a proper needs calculation.

But, generally, cover to:

- pay off outstanding debts
- childcare babysitting etc. until children will not need same
- coverage of 4 year average cost of college (assuming there is a high likelihood children of professionals will attend such). Warning, if you look at some US state systems, even in state students seem to be on the sort of $30k pa *now* number?
- enough to supplement likely income of remaining spouse, including the fact that a single widow or widower with children under 18 is unlikely to make as much career progress as one w a spouse
- any contribution to retirement savings that deceased would have made (note: it's very unlikely you can do the full amount to this, but you should at least be aware of this loss and have some coverage)

One reasonable strategy is 2 policies each:

- 20 year policy to cover existing needs & reasonable guess x 0.5

- 25-30 year policy for same x 0.5

That way, as your savings rise and your insurance need decreases, you can lapse one policy but keep the other. If one of you becomes disabled, say, or otherwise unable to work, you've still got the insurance in place.

The main thing is to lock in a low, fixed rate when your health is good.


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