How much term life insurance is enough?

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smitty1515
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How much term life insurance is enough?

Post by smitty1515 » Wed Oct 04, 2017 4:39 pm

I must be transparent that my wife and I sat down with a financial adviser. I did not go out looking for one but know someone at church who left a corporate job to enter into the industry for a faith based financial organization based out of the upper midwest. About a month ago he asked if we would sit down with him (free of charge). What I gathered initially is that he needs practice and obtains it by asking members of the congregation to come in for a free analysis. Of course if he earns as client that is icing on the cake (for him).

So far our meetings have included discussion of short and long term goals, and items such as estate planning, tax efficiency, assets, liabilities, life insurance, disability insurance, etc. I was transparent going in and told him there was a 99% chance he would not be getting us as a client. I educated him of my view of debt (I take a Dave Ramsey approach) and investing (I take a Boglehead approach). I spoke of keeping fees low and the best way for me to do that was index investing without paying an adviser money in the form of AUM.

Last night I left the meeting thinking about life insurance different than I had in the past. My thought had always been if something happens to my wife and I (ages 36/35) that I wanted enough life insurance to throw us in the ground, pay off the house (our only debt), fund my daughters education (6 yrs old), with a little extra. What I have never taken into account would be the lost income source which would exist.

We currently have $600k (term) and $450k (term) on myself and her respectively. We have one debt which is our home with ~$320k remaining. Without going into too much detail I looked at a graph that showed social security paid out until my daughter turned 18 (if one of us were to die) which would make up some of the income loss should one of us kick the bucket. In both scenarios there was certainly a shortage but much more if I were to die early.

Dave Ramsey has advocated 10 times income as a rule of thumb. We are sitting around 6.5 times right now. I have looked at the wiki and it has a nice table that looks very similar to what I looked at with the financial adviser. Just curious if members of the forum feel I'm getting sound advice and whether increasing to 10 times in term life insurance would be wise.

Thank you.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

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BL
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Re: How much term life insurance is enough?

Post by BL » Wed Oct 04, 2017 5:00 pm

I think it is reasonable and should be cheap if you go to an INDEPENDENT agent to shop various companies for a good TERM insurance with a well-rated company for 20-30 years. It is possible but unlikely that your affiliated company is a good price.
Check term4sale.com for a quick check on what is available.

It sounds like Thrivent which we have minute amounts with, but the funds are expensive (loads and ERs) and the old small whole life would not be recommended now. They do give company profits to community but finances need to be done in your best interest. Also it is not advised to do business with friends, relatives, church associates, etc., because the divorce (breakup) is more difficult when you finally see the light, and also the influence may color your decisions.

smitty1515
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Re: How much term life insurance is enough?

Post by smitty1515 » Wed Oct 04, 2017 5:07 pm

BL wrote:
Wed Oct 04, 2017 5:00 pm
I think it is reasonable and should be cheap if you go to an INDEPENDENT agent to shop various companies for a good TERM insurance with a well-rated company for 20-30 years. It is possible but unlikely that your affiliated company is a good price.
Check term4sale.com for a quick check on what is available.

It sounds like Thrivent which we have minute amounts with, but the funds are expensive (loads and ERs) and the old small whole life would not be recommended now. They do give company profits to community but finances need to be done in your best interest. Also it is not advised to do business with friends, relatives, church associates, etc., because the divorce (breakup) is more difficult when you finally see the light, and also the influence may color your decisions.
Yes it's Thrivent. I respect their giving mentality but as you mention they are doing so at the expense of the investor. As mentioned, we will not be clients and the consultation has been free with the understanding that I am not looking for a financial adviser. I will look at your recommendations on terms4sale.com. I have been surprised they have not been pushing whole life with us but before I met with him I did mention that selling junky whole life policies is ripping off many people.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

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dm200
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Re: How much term life insurance is enough?

Post by dm200 » Wed Oct 04, 2017 5:09 pm

but know someone at church who left a corporate job to enter into the industry for a faith based financial organization based out of the upper midwest.
From personal experience, some of the biggest frauds and crooks I have encountered at at or with churches and places of worship (including mone). Find someone impartial.

cornellmoore
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Re: How much term life insurance is enough?

Post by cornellmoore » Wed Oct 04, 2017 5:20 pm

Our combined (20 year) term life insurance is $1.5M between spouse & me. Since our house is paid off and we have no other debt, the term life is primarily for the future financial/educational "security" for our 10 YO kid and surviving spouse.

At this point I'm not sure we need as much term life insurance as we'd bought, but we're older with pre-existing condition(s) so we're keeping the status quo.

Note: we bought 1 policy through a financial adviser, which we came to regret doing (high cost funds, etc) and quickly ended up that relationship, and bought the other policy through AAA life insurance.

LEB1230
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Re: How much term life insurance is enough?

Post by LEB1230 » Wed Oct 04, 2017 5:41 pm

I carry 10 times my take home pay. You mentioned Dave Ramsey and I used Zander for term insurance that he endorses.

BruDude
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Re: How much term life insurance is enough?

Post by BruDude » Wed Oct 04, 2017 5:50 pm

If your income is $100k and you want income replacement, you are probably looking in the range of $1-3M depending on how much income you want to replace.

finite_difference
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Re: How much term life insurance is enough?

Post by finite_difference » Wed Oct 04, 2017 8:37 pm

For me, term life insurance is half psychological and half about giving your family enough to get by on, but you don’t want necessarily too much. I would feel weird if I got wealthy by my spouse’s demise.

But it gives me great peace of mind to know that if something happens to me my family will be OK. Not rich, but they will not starve. College and house will be paid for but my wife will still likely have to work unless she goes Mustachian :)

Same goes for kids if we both pass away — important thing there is to have good people to step in and enough funding through 18 and college.

No term for my spouse because although I would be completely psychologically devastated, working would be the only thing that could possibly keep me sane, and even that is questionable.

That’s the psychology that works for me, so you just have to figure out what works for you.

Whole life is a rip-off, so it is inconceivable that a true faith based company would sell it, unless their faith happens to be greed :)
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

spammagnet
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Re: How much term life insurance is enough?

Post by spammagnet » Thu Oct 05, 2017 12:02 am

Consider using ESPlanner. One of the things it does is to project the amount of life insurance needed on each adult to assure survivors the same standard of living in the event of untimely death. The immediate lump sum payout might make somebody feel rich but it is calculated to only replace the present value of the lost future income.

The result fluctuates over time as financial events occur or are pending. I would look at the output and pick a number that averages it out over time. There might be some years where an untimely death might result in a modest decrease in standard of living; in other years, it might result a modest increase.

If your analysis suggests you need a higher level of coverage for the near term and need less in the longer term, buy a policy that meets the long term need, including the length of the term. Then buy a second policy with a shorter term to cover the shortfall in the earlier years.

deikel
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Re: How much term life insurance is enough?

Post by deikel » Thu Oct 05, 2017 4:01 pm

dm200 wrote:
Wed Oct 04, 2017 5:09 pm
but know someone at church who left a corporate job to enter into the industry for a faith based financial organization based out of the upper midwest.
From personal experience, some of the biggest frauds and crooks I have encountered at at or with churches and places of worship (including mone). Find someone impartial.
Although that was my first reaction as well, its fair stating that this advisor was already worth it if it caused the OP to consider his current situation and possibly improve it or make a conscious decision not to change anything - I don't like the general Advisor bashing on this site.

Now for the OP questions:

My observation is that the life insurance for the non working spouse (stay at home or partially stay at home) should actually be larger than the working spouse, because trying to compensate 24h presence in a child's life is very expensive. In contrast, the death of the breadwinner is mostly 'just' a question of replacing the missing income, but the life structure of the child gets disturbed very little.

In terms of what should be covered, I would, in addition to college and mortgage, plan for a reasonable time for the surviving spouse to find new and paid work (if currently not working), so if it reasonably takes the spouse 10 years to find employment at adequate salary, one should include 10x yearly expenses extra to the insurance amount of the breadwinner. Thinking in terms of what would actually happen when one partner disappears is an unpleasant thought experiment, but it kind of gets the point across as to what need to be covered for quite a while.

10x yearly salary seems a very simplistic approximation and is arguably too high for the higher earning spouse and probably too low for a part-time employed spouse.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immidiatly and destroy any copy or remembrance of it.

learning_head
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Re: How much term life insurance is enough?

Post by learning_head » Thu Oct 05, 2017 10:17 pm

I would think the formula should be based more on expenses that you want to cover, not income. If you save a lot, your expenses are much lower than income and thus lower amount is needed for term insurance. Also in that case, after 5-10 years, you'd save enough to need even less insurance and may consider just getting another insurance for lesser amount at that point (even though you will be older).

blueman457
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Re: How much term life insurance is enough?

Post by blueman457 » Thu Oct 05, 2017 10:43 pm

After going through this exercise myself, it ended up 10x of gross income. There are many factors that go into it, but the rule of thumb worked out for me.

Blue man

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