Baby on way: life insurance Qs

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Cartographer
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Baby on way: life insurance Qs

Post by Cartographer » Sun Aug 05, 2018 3:15 pm

DW and I are expecting our first child! We're still a ways away, but it's probably time for us to do some "real adulting" and get life insurance, wills, etc.

Right now, I'm looking into term life insurance, and trying to figure out how much/what term we should get. Most of the articles/calculators I come across online measure in terms of income, which seems like the completely wrong way to measure life insurance needs (it should be based on expenses, no?). They also do not seem to account for dual-income households. Thus, I'm pretty skeptical of the broad recommendations.

Your thoughts are greatly appreciated.


Details:

In the near term, we expect our annual expenses to stay more or less the same (maybe increase slightly) once the child arrives. We won't be traveling nearly as much, and the savings should offset most or all of the baby costs. Let's say our annual (after tax) expenses will be $X per year.

- Our ages when baby arrives: 30
- Total after tax income, including employer retirement contributions: 4X, split pretty evenly between myself and DW
- Estimated total savings when baby arrives: 10X (3X in retirement accounts, 7X between cash and liquid investments. No house)
- Each of us has approximately 2X life insurance policy through work
- Our jobs are essentially guaranteed for the next 3 years or so. We're both pretty employable, so after that we should have little problem finding a job if either of us lose our current one. However, the income numbers could easily vary by 25% if we switch jobs
- As an extremely rough estimate, the total inflation-adjusted cost of raising the child through college will be 12X (including 1X per year for 4 years of college)
- We don't currently have any intention to FIRE

The above estimates are conservative, so there's some padding if we judged incorrectly.

I think we're pretty set in the event that only one of us passes, as the other would easily be able to cover costs. The main concern is if both of us pass. We want to make sure our kid is set all the way though college. We don't feel the need to leave any financial legacy behind (not sure if that's usually considered when buying life insurance).



Here are my questions, and thanks in advance for your input!

(0) Do we even need life insurance at this point? My emotional self says of course we do in order to ensure the well-being of our child (and we can certainly afford it). But my rational self observes that our current assets (plus employer life insurance) should be sufficient to cover a child's cost all the way through college.

(1) Should the possibility of a second child be considered now? We have no idea if we will have one, but it is a possibility. Seems to me we should only buy life insurance considering one child, and if a second one arrives, we buy whatever we need to supplement our existing plans.

(2) Assuming yes to (0), how much life insurance would be recommended based on our situation?

(3) What is the right way to think about the duration of the insurance? The usual recommendation seems to be for as long as someone is dependent on your income, which would be something like 20-25 years. However, such a term seems unnecessary: toward the end, as most of the costs have already been paid, and our savings will be much greater.

(4) How should we factor in a possible house purchase? This won't happen for at least a couple years (probably 3+), but will almost certainly happen at some point while the child is dependent on us. As a rough estimate, let's say buying a home won't significantly alter our net worth progression (but it's hard to say), but it would tie up at least 3X of our current assets for down payment and an additional, say, 0.5X per year of our future savings.

(5) When should we buy life insurance? Of course the longer we wait and older we get, the higher the premiums. But on the other hand, if we wait maybe we will have more information, such as if the child will be special needs, etc. (As a side question, we're both 29 now, but will be turning 30 before the baby comes. I've read claims that insurance rates spike at decade birthdays, though I'm skeptical. Is there any truth to this?)

(6) I've read about something called "joint life insurance", where it is possible to only have the benefit payed out if both people die. Presumably such a plan would be much cheaper since the probability of payout is much lower, and would seem to fit our needs. Does anyone have experience with these kinds of plans? Are there recommended? Any pitfalls we should be aware of?

(7) Are there any other dimensions to the life insurance question that I'm missing?

Leemiller
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Re: Baby on way: life insurance Qs

Post by Leemiller » Sun Aug 05, 2018 4:01 pm

My husband and I both have life insurance through work and a stand-alone policy. The stand-alone would pay off our mortgage and cover college. Without a mortgage, either of our incomes would be more than enough to keep the family home and lifestyle as it is now. Personally, I like having a stand-alone in case one of us were to get laid off or otherwise leave a job and then not be insurable.

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dm200
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Re: Baby on way: life insurance Qs

Post by dm200 » Sun Aug 05, 2018 4:24 pm

Buy 30 year level term on each. Do it now - do not risk medical issues coming up.

BruDude
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Re: Baby on way: life insurance Qs

Post by BruDude » Sun Aug 05, 2018 4:42 pm

You’re overthinking it, just keep it simple. Term life insurance is ridiculously cheap at your age. Buy a 30 year term policy on each of you for 10-20x income, have some peace of mind, and leave it at that.

More importantly, make sure you have adequate disability insurance. If you only have coverage from your employer, it’s probably not good enough. What’s your plan if one of you becomes disabled, your household income is cut in half, and now all of a sudden everything has changed?

Cartographer
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Re: Baby on way: life insurance Qs

Post by Cartographer » Mon Aug 06, 2018 9:11 am

BruDude wrote:
Sun Aug 05, 2018 4:42 pm
You’re overthinking it, just keep it simple. Term life insurance is ridiculously cheap at your age. Buy a 30 year term policy on each of you for 10-20x income, have some peace of mind, and leave it at that.

More importantly, make sure you have adequate disability insurance. If you only have coverage from your employer, it’s probably not good enough. What’s your plan if one of you becomes disabled, your household income is cut in half, and now all of a sudden everything has changed?
Thanks for pointing out the need for disability insurance; we hadn't considered that yet. We will look into it.

10-20 times income seems to be the common recommendation but it doesn't seem applicable in our case. In the event one of us passes, 20 times income would amount to something like 50 years of annual expenses for our entire family. Seems like overkill given that the surviving spouse can cover all expenses anyway. And it's not what I'd call cheap: for 20 times income for a 30 year term, it would add about 10% to our annual expenses. While we can afford it, it seems like an unnecessary expense.

Shouldn't the amount of life insurance be a function of expenses, not income? And shouldn't current assets also figure into the equation?

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Re: Baby on way: life insurance Qs

Post by robebibb » Mon Aug 06, 2018 9:37 am

You may be underestimating the cost of child care or maybe you have a very large vacation budget. It is not unusual for child care to run $1k a month per child so imagine paying $24k a year for a few years plus the cost of summer and after-school care once kids are older. I agree it is wise to purchase insurance based on expenses, not income so it is likely you will need less than a typical couple since you are both employable in a high (relative to your expenses) paying field. Also consider plans for future children when you purchase insurance since there is no guarantee you will be as healthy tomorrow as you are today.

Cartographer
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Re: Baby on way: life insurance Qs

Post by Cartographer » Mon Aug 06, 2018 9:53 am

robebibb wrote:
Mon Aug 06, 2018 9:37 am
You may be underestimating the cost of child care or maybe you have a very large vacation budget. It is not unusual for child care to run $1k a month per child so imagine paying $24k a year for a few years plus the cost of summer and after-school care once kids are older. I agree it is wise to purchase insurance based on expenses, not income so it is likely you will need less than a typical couple since you are both employable in a high (relative to your expenses) paying field. Also consider plans for future children when you purchase insurance since there is no guarantee you will be as healthy tomorrow as you are today.
$1k a month for childcare would be a steal in my area! We have recently been spending a lot on travel, but I'm definitely doing some averaging in my expense estimation. Our expenses the first few years will certainly be higher due to daycare, but should drop to below our current spending once the child enters school.

Good point regarding plans for future children.

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dm200
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Re: Baby on way: life insurance Qs

Post by dm200 » Mon Aug 06, 2018 10:16 am

BruDude wrote:
Sun Aug 05, 2018 4:42 pm
You’re overthinking it, just keep it simple. Term life insurance is ridiculously cheap at your age. Buy a 30 year term policy on each of you for 10-20x income, have some peace of mind, and leave it at that.

More importantly, make sure you have adequate disability insurance. If you only have coverage from your employer, it’s probably not good enough. What’s your plan if one of you becomes disabled, your household income is cut in half, and now all of a sudden everything has changed?
Yes - to be on the safe side - go with 30 year -

Rupert
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Re: Baby on way: life insurance Qs

Post by Rupert » Mon Aug 06, 2018 10:34 am

Think of all the things your partner presently does around the house, e.g., cooking, cleaning, etc. If your partner dies, you would either have to do all that work yourself in addition to your job or you would have to pay someone to do that work for you. Consider the possibility that your surviving spouse may not be able to continue working at the same job or at all after your death. People need time to grieve and it's incredibly hard to do that with children while maintaining a normal job. So, no, your present expenses are not a good way to gauge how much life insurance you need. Also, how would your surviving spouse pay to educate your children, buy them a car for college, etc., if you die? Again, present expenses are not the only thing you should be considering. Consider stacking two policies -- one 30-year and one 20-year, as opposed to a single 30-year -- for each of you because your need for life insurance does tend to decrease as you age and your savings increase. It's important to remember that you can always cancel an insurance policy if you determine later you don't need it, but you can't always buy more insurance later if you've become overweight, sick, etc. Finally, don't forget to factor in Social Security survivor benefits when deciding how much insurance you need.

HEDGEFUNDIE
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Re: Baby on way: life insurance Qs

Post by HEDGEFUNDIE » Mon Aug 06, 2018 10:50 am

Rupert wrote:
Mon Aug 06, 2018 10:34 am
Also, how would your surviving spouse pay to educate your children, buy them a car for college, etc., if you die?
Umm...presumably the OP’s spouse would continue working his/her six-figure job. And a few years down the line it’s not unlikely that he/she will remarry (sorry, OP).

I reluctantly agree with the consensus opinion on this board that term life insurance is cheap enough for young healthy 30-somethings that it’s kind of a no brainer.

But people should consider just how unlikely it is that a young college educated widower will be completely destitute and out on the street with the kids if his/her spouse were to pass.

And if you are thinking about the insurance as a lottery ticket/lifestyle upgrade for your surviving family, be honest with yourself about that.

Rupert
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Re: Baby on way: life insurance Qs

Post by Rupert » Mon Aug 06, 2018 10:58 am

HEDGEFUNDIE wrote:
Mon Aug 06, 2018 10:50 am
Rupert wrote:
Mon Aug 06, 2018 10:34 am
Also, how would your surviving spouse pay to educate your children, buy them a car for college, etc., if you die?
Umm...presumably the OP’s spouse would continue working his/her six-figure job. And a few years down the line it’s not unlikely that he/she will remarry (sorry, OP).

I reluctantly agree with the consensus opinion on this board that term life insurance is cheap enough for young healthy 30-somethings that it’s kind of a no brainer.

But people should consider just how unlikely it is that a young college educated widower will be completely destitute and out on the street with the kids if his/her spouse were to pass.

And if you are thinking about the insurance as a lottery ticket/lifestyle upgrade for your surviving family, be honest with yourself about that.
Did you read the preceding sentence where I said, "Consider the possibility that your surviving spouse may not be able to continue working at the same job or at all after your death"? Just trying to make OP think more broadly.

MrBeaver
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Re: Baby on way: life insurance Qs

Post by MrBeaver » Mon Aug 06, 2018 11:21 am

I just went through a similar process, though our situation (ages, number of children, etc.) are somewhat different. I was also 'disappointed' with the standard advice of 10-20x salary independent of current net worth, expenses, or estimated future large expenses (college). Because of that, please take my thoughts with a grain of salt as I don't speak from years of experience on the 'other side' of this decision.

I ended up creating a spreadsheet with year=line, and accounting for:
  • Projected portfolio growth
  • Spending level
  • SS survivor benefit
  • Projected college savings
  • Projected college cost (future value needed at each year)
  • Lump sum needed to pay off house (with principal being paid down yearly) and cover future value of college
  • Portfolio needed to sustain withdrawals of single parent caregiver or new guardian (if we both pass) to eventual portfolio need at retirement
The result is that it is highly dependent on future investment returns and future college costs, which are far from certain. If I assume 3.5% real investment returns over 20 years, I need 18x spending for the entire period. If I assume 6% real returns, I only need 8x spending for 10 years. At 0.5% real returns, I would need 40x spending. In the end, I went with 18x, which was pretty close to 10x salary. The difference between 18x and 8x if invested would only have amounted to around 7% of my annual spending once the kids are out of college, or 0.2% of my net worth. In other words, whether I buy an 18x spend policy now or an 8x spend policy now will be less important to my retirement income than whether I withdrawal from my portfolio on a 'lucky' day or an 'unlucky' day.

I guess I had to go through all that just to do what most people say ;) (10x salary)

Even though you say you don't have any intention for FIRE, your current savings rate (75%) and lower savings rate even if one of you quits a job and stays home to care for the child (50%) will likely put you on path for FIRE. Either that, or gradually increasing your giving or consumption while you continue to work since your portfolio would support FI before typical retirement age.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(0) Do we even need life insurance at this point? My emotional self says of course we do in order to ensure the well-being of our child (and we can certainly afford it). But my rational self observes that our current assets (plus employer life insurance) should be sufficient to cover a child's cost all the way through college.
My guess is that you might at least have a shortfall within the first 5-10 years of the child's life, again, dependent on investment returns. I'm assuming you would want enough so that your child's guardian is not burdened and could give your child the same attention you do or more, which may require that they sacrifice their own income.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(1) Should the possibility of a second child be considered now? We have no idea if we will have one, but it is a possibility. Seems to me we should only buy life insurance considering one child, and if a second one arrives, we buy whatever we need to supplement our existing plans.
Either way is fine. There is some overhead cost to writing a policy, so two separate policies for 1x each will be slightly more expensive than a single policy for 2x. Some policies let you reduce the benefit amount later (also reducing premiums), but most have a limit to the percentage of reduction.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(2) Assuming yes to (0), how much life insurance would be recommended based on our situation?
10-20x expenses for 20-25 years. Drop it completely once you become FI (even if you choose to continue working)
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(3) What is the right way to think about the duration of the insurance? The usual recommendation seems to be for as long as someone is dependent on your income, which would be something like 20-25 years. However, such a term seems unnecessary: toward the end, as most of the costs have already been paid, and our savings will be much greater.
Making my spreadsheet helped me see that there are several issues: insurance payout amount is not indexed for inflation. That means that even as the kids get older and the future need reduces, the future value of the payout also decreases. I'd still suggest locking in a 20-25 year term now and dropping it if it becomes unnecessary. With your current income and savings rate, the cost is a drop in the bucket anyway.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(4) How should we factor in a possible house purchase? This won't happen for at least a couple years (probably 3+), but will almost certainly happen at some point while the child is dependent on us. As a rough estimate, let's say buying a home won't significantly alter our net worth progression (but it's hard to say), but it would tie up at least 3X of our current assets for down payment and an additional, say, 0.5X per year of our future savings.
In my spreadsheet, I assumed a need for an immediate principal lump-sum pay down to zero from the life insurance benefit.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(5) When should we buy life insurance? Of course the longer we wait and older we get, the higher the premiums. But on the other hand, if we wait maybe we will have more information, such as if the child will be special needs, etc. (As a side question, we're both 29 now, but will be turning 30 before the baby comes. I've read claims that insurance rates spike at decade birthdays, though I'm skeptical. Is there any truth to this?)
Buy now. The future risk of contracting a chronic or terminal illness which drastically raises rates is much more detrimental than the future risk of buying too much insurance now, as you can always cancel later. If a child has more needs and your health is fine, you can buy more life insurance on yourself later.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(6) I've read about something called "joint life insurance", where it is possible to only have the benefit payed out if both people die. Presumably such a plan would be much cheaper since the probability of payout is much lower, and would seem to fit our needs. Does anyone have experience with these kinds of plans? Are there recommended? Any pitfalls we should be aware of?
No idea about the product.

For us, one parent is staying home, so death of one == death of both, from a financial standpoint, as we would want to provide near-FI to the new guardians of our children anyway. Remember for instance, that even if you leave enough to support them until the child graduates, they may have reduced their income to accommodate raising the child which would mean their own retirement portfolio would not grow as much as they planned.
Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
(7) Are there any other dimensions to the life insurance question that I'm missing?
The biggest eye-opening part to me was seeing how the payout need stays relatively flat in nominal dollar terms (which is how it's paid) since inflation deflates the value of the payout as the future value needed declines. Thus, level-term makes a lot more sense than I originally thought (I originally thought I wished decreasing term still existed).

With your income and savings rate, buy now, cancel once FI.
Last edited by MrBeaver on Mon Aug 06, 2018 11:29 am, edited 1 time in total.

HEDGEFUNDIE
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Re: Baby on way: life insurance Qs

Post by HEDGEFUNDIE » Mon Aug 06, 2018 11:23 am

Rupert wrote:
Mon Aug 06, 2018 10:58 am
HEDGEFUNDIE wrote:
Mon Aug 06, 2018 10:50 am
Rupert wrote:
Mon Aug 06, 2018 10:34 am
Also, how would your surviving spouse pay to educate your children, buy them a car for college, etc., if you die?
Umm...presumably the OP’s spouse would continue working his/her six-figure job. And a few years down the line it’s not unlikely that he/she will remarry (sorry, OP).

I reluctantly agree with the consensus opinion on this board that term life insurance is cheap enough for young healthy 30-somethings that it’s kind of a no brainer.

But people should consider just how unlikely it is that a young college educated widower will be completely destitute and out on the street with the kids if his/her spouse were to pass.

And if you are thinking about the insurance as a lottery ticket/lifestyle upgrade for your surviving family, be honest with yourself about that.
Did you read the preceding sentence where I said, "Consider the possibility that your surviving spouse may not be able to continue working at the same job or at all after your death"? Just trying to make OP think more broadly.
This one puzzles me. If the OP’s spouse is a doctor, lawyer, software engineer, what exactly would permanently prevent him/her from working after OP dies? They presumably already have child care as they are a dual income family.

The general point I’m trying to make is that life insurance was conceived of in a time when the man was the sole breadwinner and the wife was a SAHM without any outside career prospects. Hardly what most families look like today.
Last edited by HEDGEFUNDIE on Mon Aug 06, 2018 11:25 am, edited 1 time in total.

knowledge
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Re: Baby on way: life insurance Qs

Post by knowledge » Mon Aug 06, 2018 11:23 am

You're saving 75% of your after tax income with a child and already have 10X your estimated annual spending. More likely than not, you'll be self-insured by the time your child is off to college. So if you want to save some money, go get a 20 year term. Assuming both of you are not at risk, it should be quite cheap.

As for the amount? I'd look to buy an slightly less to the amount of wealth each spouse would generate over that 20 year period. Hedge a bit less if you feel like it's outlandish. The premiums should scale linearly so long as the benefit doesn't get out of whack.

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Re: Baby on way: life insurance Qs

Post by delamer » Mon Aug 06, 2018 11:28 am

HEDGEFUNDIE wrote:
Mon Aug 06, 2018 10:50 am
Rupert wrote:
Mon Aug 06, 2018 10:34 am
Also, how would your surviving spouse pay to educate your children, buy them a car for college, etc., if you die?
Umm...presumably the OP’s spouse would continue working his/her six-figure job. And a few years down the line it’s not unlikely that he/she will remarry (sorry, OP).

I reluctantly agree with the consensus opinion on this board that term life insurance is cheap enough for young healthy 30-somethings that it’s kind of a no brainer.

But people should consider just how unlikely it is that a young college educated widower will be completely destitute and out on the street with the kids if his/her spouse were to pass.

And if you are thinking about the insurance as a lottery ticket/lifestyle upgrade for your surviving family, be honest with yourself about that.

There is a huge gap between “ completely destitute” and being able to maintain their previous lifestyle.

We took 20 year level term policies when our kids were toddlers. That got us through the college years and then we let them expire. We looked at any employer-provided insurance as a bonus.

Rupert
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Re: Baby on way: life insurance Qs

Post by Rupert » Mon Aug 06, 2018 11:30 am

HEDGEFUNDIE wrote:
Mon Aug 06, 2018 11:23 am

This one puzzles me. If the OP’s spouse is a doctor, lawyer, software engineer, what exactly would permanently prevent him/her from working after the death of a spouse? They presumably already have child care as they are a dual income family.
You obviously don't have any idea what it's like to care for a minor child who has just lost his/her parent while grieving yourself. I'll just leave it at that. And the type of childcare that most dual-income families have -- daycare -- is not all the childcare that is required. Who cares for the children when you're on an out-of-town business trip? Who makes dinner when you work past 6 p.m.? Who runs to school to pick up the kid when he/she throws up in the middle of the day? Again, there is a need to think broadly here. Best to buy too much initially and cancel/reduce it later than to buy too little and not be able to qualify for it later.

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Re: Baby on way: life insurance Qs

Post by dcabler » Mon Aug 06, 2018 11:35 am

I've always had a free policy through work, which I ignore since employment can change at any time.

When our kid was born, we bought a group life policy through a professional association that I am a member of. We had our kid later in life, so we already had reasonable assets, but we purchased enough such that if I die before retirement, this would get my wife to the finish line + pay for college for my daughter. We also added a policy for my wife which would be enough to pay for part time care for our daughter should my wife pass first.

Time has now gone by. Our daughter is now 16 and can reasonably take care of much of daily life functions so I'm considering reducing my wife's policy drastically. Likewise, we're just about at the finish line ourselves, with college funded. So I will reduce my coverage as well. Our policy has rates that increase every 5 years anyway, as we age, so I have generally been reducing the coverage accordingly to keep the premiums approx. the same over the years....

YMMV

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Re: Baby on way: life insurance Qs

Post by Boglegrappler » Mon Aug 06, 2018 11:40 am

The general point I’m trying to make is that life insurance was conceived of in a time when the man was the sole breadwinner and the wife was a SAHM without any outside career prospects. Hardly what most families look like today.
Obviously you need life insurance on both spouses if both are contributing income, but you also need it on the wife if she is a stay at home mom. Years ago I met a guy who was a widower in his early 30s with three kids. It got my attention.

My suggestion is to consider the situation where both parents die simultaneously tomorrow. Who will be the guardian, and how will the children be supported. How will the guardian feel if the child has a seven figure trust balance, and there is no provision to the guardian for the expense and effort required to raise someone else child? That needs to be addressed.

Then consider the situation where one parent dies, and the other has to run the household and support it as well. A little thoughtfulness will get you to a decent answer. It will probably mean that you end up buying what seems like a lot of insurance. But at your ages, its quite inexpensive.

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dm200
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Re: Baby on way: life insurance Qs

Post by dm200 » Mon Aug 06, 2018 12:06 pm

dcabler wrote:
Mon Aug 06, 2018 11:35 am
I've always had a free policy through work, which I ignore since employment can change at any time.

When our kid was born, we bought a group life policy through a professional association that I am a member of. We had our kid later in life, so we already had reasonable assets, but we purchased enough such that if I die before retirement, this would get my wife to the finish line + pay for college for my daughter. We also added a policy for my wife which would be enough to pay for part time care for our daughter should my wife pass first.

Time has now gone by. Our daughter is now 16 and can reasonably take care of much of daily life functions so I'm considering reducing my wife's policy drastically. Likewise, we're just about at the finish line ourselves, with college funded. So I will reduce my coverage as well. Our policy has rates that increase every 5 years anyway, as we age, so I have generally been reducing the coverage accordingly to keep the premiums approx. the same over the years....

YMMV
Years ago, when employed by several large corporations, I had such employer paid life insurance. The risk is that it can go away if you leave the employer. Check the "fine print" on such life insurance - almost always there is the option to "convert" if you leave. WARNING - almost always this conversion option is to convert to a very expensive "whole life" (or similar) life insurance policy.

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Re: Baby on way: life insurance Qs

Post by afan » Mon Aug 06, 2018 12:38 pm

HEDGEFUNDIE wrote:
Mon Aug 06, 2018 11:23 am


This one puzzles me. If the OP’s spouse is a doctor, lawyer, software engineer, what exactly would permanently prevent him/her from working after OP dies? They presumably already have child care as they are a dual income family.
Injured in the same accident that killed the spouse.

At age 30 both are far more likely to die in an accident than to succumb to cancer or heart disease.

OP should get insurance on both lives asap. For the wife, it may be more difficult or more expensive because, I gather, she is already pregnant. Get good long term coverage now in any case. After the baby comes shop for insurance for the wife again, at which time she may get better rates.

Right now I would err on the side of too much insurance. You can always reduce it later.
I would assume you will have more than one child unless you plan to be sterilized after the first one is born. You are planning for contingencies and not all pregnancies are planned.

Work through realistic assumptions about expenses associated with raising a child.

At some point your 16 year old may be fine being home alone after school. Not necessarily a great thing, depending on the kid and the neighborhood. To an extent the appeal of all sorts of after school activities is to keep the kids occupied with responsible adults around while the parents are still at work. You kid may never get a scholarship on the swimming team, but being at swimming practice is a lot healthier than hanging out on their on as a high school kid.

Those enrichment activities can cost money. Some are quite expensive.
With one parent working full time and the other dead the working parent may need someone to clean and cook. Working full time without that help may be difficult or impossible, depending on the demands of the job.

Once you have a large amount of insurance in place, you can work through better predictions of expenses for 2 or 3 kids. Project into the future allowing for real returns that may be disappointing. Include the cost of college or grad school if you intend to cover that. Factor in the cost of a house. It strikes those of us who have kids that figuring on expenses going down is wildly improbably. If you are both working full time it is hard to see how you could travel enough for reducing that to cover the cost of one child.
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Re: Baby on way: life insurance Qs

Post by dm200 » Mon Aug 06, 2018 12:41 pm

Right now I would err on the side of too much insurance. You can always reduce it later.
I would assume you will have more than one child unless you plan to be sterilized after the first one is born. You are planning for contingencies and not all pregnancies are planned.


Yes - I agree on both points!

dcabler
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Re: Baby on way: life insurance Qs

Post by dcabler » Mon Aug 06, 2018 2:05 pm

dm200 wrote:
Mon Aug 06, 2018 12:06 pm
dcabler wrote:
Mon Aug 06, 2018 11:35 am
I've always had a free policy through work, which I ignore since employment can change at any time.

When our kid was born, we bought a group life policy through a professional association that I am a member of. We had our kid later in life, so we already had reasonable assets, but we purchased enough such that if I die before retirement, this would get my wife to the finish line + pay for college for my daughter. We also added a policy for my wife which would be enough to pay for part time care for our daughter should my wife pass first.

Time has now gone by. Our daughter is now 16 and can reasonably take care of much of daily life functions so I'm considering reducing my wife's policy drastically. Likewise, we're just about at the finish line ourselves, with college funded. So I will reduce my coverage as well. Our policy has rates that increase every 5 years anyway, as we age, so I have generally been reducing the coverage accordingly to keep the premiums approx. the same over the years....

YMMV
Years ago, when employed by several large corporations, I had such employer paid life insurance. The risk is that it can go away if you leave the employer. Check the "fine print" on such life insurance - almost always there is the option to "convert" if you leave. WARNING - almost always this conversion option is to convert to a very expensive "whole life" (or similar) life insurance policy.
Yep, exactly!

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GoldStar
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Re: Baby on way: life insurance Qs

Post by GoldStar » Mon Aug 06, 2018 3:38 pm

A lot of folks overthink this.
A lot of folks over-estimate (Think they need enough to pay off their mortgage, and pay every other expense for a lifetime including college - look at college as an expense you will save for similar to all your other expenses.).
I would think of it this way - if you were to go tomorrow - how much additional money would your spouse need to continue on normally paying all expenses? Then just assume a 4% yearly Withdraw rate (which will get through 30 years - enough to get a couple of kids through college for one of you).
So if you think your spouse would need $50K a year in additional income to cover expenses if you should expire tomorrow then you need a ~$1.3M policy.
If you get a $2M policy it could provide $80K a year of income.

I never understand why folks just don't apply the same math they use for retirement :)

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Re: Baby on way: life insurance Qs

Post by Twood » Mon Aug 06, 2018 3:42 pm

A logistical issue to "buy it now" - buying a life insurance policy on a pregnant female is very expensive. Instead I would recommend getting the male half now, and the female half after baby arrives.

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Re: Baby on way: life insurance Qs

Post by Meg77 » Mon Aug 06, 2018 3:55 pm

Cartographer wrote:
Sun Aug 05, 2018 3:15 pm
DW and I are expecting our first child! We're still a ways away, but it's probably time for us to do some "real adulting" and get life insurance, wills, etc. Congrats!

Right now, I'm looking into term life insurance, and trying to figure out how much/what term we should get. Most of the articles/calculators I come across online measure in terms of income, which seems like the completely wrong way to measure life insurance needs (it should be based on expenses, no?). They also do not seem to account for dual-income households. Thus, I'm pretty skeptical of the broad recommendations. I think you're thinking about this the right way. But expenses change a lot over 20 year periods; it's ok to insure for a bit more than you currently spend, given the increased expenses you're likely to embrace over the next 2 decades if you both continue to work and become homeowners and have more kids. In short, you may want to insure against the loss of the lifestyle you hope to have in 7 years, not the lifestyle you currently have.

Your thoughts are greatly appreciated.


Details:

In the near term, we expect our annual expenses to stay more or less the same (maybe increase slightly) once the child arrives. We won't be traveling nearly as much, and the savings should offset most or all of the baby costs. Let's say our annual (after tax) expenses will be $X per year.

- Our ages when baby arrives: 30
- Total after tax income, including employer retirement contributions: 4X, split pretty evenly between myself and DW
- Estimated total savings when baby arrives: 10X (3X in retirement accounts, 7X between cash and liquid investments. No house)
- Each of us has approximately 2X life insurance policy through work
- Our jobs are essentially guaranteed for the next 3 years or so. We're both pretty employable, so after that we should have little problem finding a job if either of us lose our current one. However, the income numbers could easily vary by 25% if we switch jobs
- As an extremely rough estimate, the total inflation-adjusted cost of raising the child through college will be 12X (including 1X per year for 4 years of college)
- We don't currently have any intention to FIRE

The above estimates are conservative, so there's some padding if we judged incorrectly.

I think we're pretty set in the event that only one of us passes, as the other would easily be able to cover costs. The main concern is if both of us pass. We want to make sure our kid is set all the way though college. We don't feel the need to leave any financial legacy behind (not sure if that's usually considered when buying life insurance).



Here are my questions, and thanks in advance for your input!

(0) Do we even need life insurance at this point? My emotional self says of course we do in order to ensure the well-being of our child (and we can certainly afford it). But my rational self observes that our current assets (plus employer life insurance) should be sufficient to cover a child's cost all the way through college. You may not "need" it desperately, but it's still a good buy unless one of you is borderline uninsurable due to some medical issue and the cost is exorbitant. Considering that you have plenty of discretionary income, I would get at least a small policy in place on each of you. You can always cancel it if/when you are truly self insured (and once you know for sure what the future will bring with regard to your home and family size).

(1) Should the possibility of a second child be considered now? We have no idea if we will have one, but it is a possibility. Seems to me we should only buy life insurance considering one child, and if a second one arrives, we buy whatever we need to supplement our existing plans. No, though you could err on the higher side of the range you're considering if you plan to have more kids later. Kid #2 won't increase your expenses by exactly 2x anyway, especially if Kid #1 is school age by the time you have another.

(2) Assuming yes to (0), how much life insurance would be recommended based on our situation? Since you don't own a house now but plan to buy one in the coming years, this is harder. Normally in cases like yours (dual income, similar amounts, plenty of cash flow), I'd say at a minimum to get enough life insurance to pay off the mortgage if either of you dies. You could therefore get enough to *buy* a house if either of you dies, so the other could do that without worrying about qualifying for a mortgage on his or her own. Again that's a starting point - it does enough to make cash flow a non-issue for most households but doesn't over insure to the point that the remaining spouse can immediately retire upon the death of the other.

(3) What is the right way to think about the duration of the insurance? The usual recommendation seems to be for as long as someone is dependent on your income, which would be something like 20-25 years. However, such a term seems unnecessary: toward the end, as most of the costs have already been paid, and our savings will be much greater.Since you're so close to self insured with 10x expenses already in savings and investments, I'd say you can definitely get a shorter term. The caveat is if there is any chance one of you will want to stay home with the kids (and therefore slash your savings rate). The price difference isn't likely to be much between 15 years and 25 at your age, so there's no harm in going longer. Again, you can always cancel the policy later if/when you don't need it.

(4) How should we factor in a possible house purchase? This won't happen for at least a couple years (probably 3+), but will almost certainly happen at some point while the child is dependent on us. As a rough estimate, let's say buying a home won't significantly alter our net worth progression (but it's hard to say), but it would tie up at least 3X of our current assets for down payment and an additional, say, 0.5X per year of our future savings. If one of you dies while you have a baby/toddler, life for the other one will change dramatically. Wanting or needing to move from the home you share now - and presumably going ahead and buying a home given that is the goal- will be something that will likely happen. So factor that into the insurance need. For example, if you want to be able to afford to take a year off from work and buy a house in cash if your spouse dies, put enough to do that in the insurance proceeds (plus enough to fully fund college if that's something you want to insure for.)

(5) When should we buy life insurance? Of course the longer we wait and older we get, the higher the premiums. But on the other hand, if we wait maybe we will have more information, such as if the child will be special needs, etc. (As a side question, we're both 29 now, but will be turning 30 before the baby comes. I've read claims that insurance rates spike at decade birthdays, though I'm skeptical. Is there any truth to this?) It may be harder for the pregnant partner to obtain it prior to giving birth. I'd get it ASAP on both of you though; no point waiting!

(6) I've read about something called "joint life insurance", where it is possible to only have the benefit payed out if both people die. Presumably such a plan would be much cheaper since the probability of payout is much lower, and would seem to fit our needs. Does anyone have experience with these kinds of plans? Are there recommended? Any pitfalls we should be aware of? I don't know about this but it could be a good option, especially since you both each have some employer coverage as well.

(7) Are there any other dimensions to the life insurance question that I'm missing? Minors can't inherit money or life insurance proceeds, so you'll need to set up a trust for the life insurance to go into if both of you die. Decide who will be trustee (usually a good idea for this person to be different from the person who would get custody of your child), how it will be invested, what it can be used for, what age the child will have to be to take control, etc.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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dm200
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Re: Baby on way: life insurance Qs

Post by dm200 » Mon Aug 06, 2018 4:59 pm

Twood wrote:
Mon Aug 06, 2018 3:42 pm
A logistical issue to "buy it now" - buying a life insurance policy on a pregnant female is very expensive. Instead I would recommend getting the male half now, and the female half after baby arrives.
Learn something new here all the time! Never thought of that ;)

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Re: Baby on way: life insurance Qs

Post by MP173 » Mon Aug 06, 2018 5:53 pm

Unfortunately I have had to work thru that issue. My wife died of cancer at age 43 and we had 14 and 5 year old boys.

I also talked to a mutual acquaintance at church yesterday who's wife died at a similar age leaving him as a single dad with a daughter entering high school and son a few years younger. We caught up on our lives and the fact that all of our "kids" are now employed adults! Great feeling and both of us very, very proud single dads. Ironically, both of our wives worked together as nurses.

Here is my advice:
1. Make sure adequate long term disability insurance is in effect.
2. If your employers offer supplemental life insurance take a look at the costs and compare to term.
3. Determine your "costs" involved with being a single parent...sorry to be so blunt, but this is about financial security. Figure in anticipated college costs.
4. Buy adequate life insurance to cover...but remember that Social Security will provide funding. This benefits lasts until age 18 or the month after graduation from high school.

My wife and I addressed these issues about a year prior to her cancer diagnosis and made adjustments. We waited too long, but made the decision before it became unavailable to due existing conditions.

Now, that being said, I never touched a dime of the life insurance benefit, but my situation was probably unique in this type of situation. For most, the benefit would be required to maintain a life style.

Ed

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dm200
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Re: Baby on way: life insurance Qs

Post by dm200 » Mon Aug 06, 2018 5:58 pm

Let me add a comment about the unfortunate situation of the death of a parent when any children are under 18.

[If I have any details incorrect - please comment]

if the deceased parent qualifies under Social Security - the child is eligible for SS funds until the age of 18 (maybe small added time in some cases). This is true even if the surviving parent remarries. HOWEVER, I believe that if the new "step-parent" formally adopts the child, then the benefit goes away.

Friends of ours were in that situation - and, therefore, the "step-mom" did not go through actually "adopting" the children.

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