I am thinking about life insurance incorrectly?

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cabfranc
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I am thinking about life insurance incorrectly?

Post by cabfranc » Tue Jun 30, 2020 7:42 am

We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?

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Re: I am thinking about life insurance incorrectly?

Post by AlohaJoe » Tue Jun 30, 2020 7:49 am

cabfranc wrote:
Tue Jun 30, 2020 7:42 am
The wiki and other websites talk about determining life insurance needs as income replacement.
That's not what the wiki says. (I can't speak for every other website in the world.) The wiki says "Replacing 100% of your income may be a good starting place." It then goes on to provide a worksheet whose first line is "annual income needed" which further makes clear that 100% income replacement is not the goal.

https://www.bogleheads.org/wiki/Life_in ... ance_needs

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galving
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Re: I am thinking about life insurance incorrectly?

Post by galving » Tue Jun 30, 2020 7:53 am

Rule of thumb was 7 x income, so $170k x 7 puts you at about $1.2 Mio.
With the $1 Mio policy you're probably ok and within the margin of error.

We took out term insurance just before our son materialized and we're in a similar situation.
Now our incomes are higher and we'd be well below the 7 x threshold but our expenses haven't grown so we've left the policies as they were originally completed.

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Re: I am thinking about life insurance incorrectly?

Post by simplesimon » Tue Jun 30, 2020 7:54 am

cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
If your large future liabilities are covered by your insurance and you're high savers, then you're fine.

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Re: I am thinking about life insurance incorrectly?

Post by deltaneutral83 » Tue Jun 30, 2020 8:09 am

Depends on expenses vs savings to me. If OP's household saves 40% of income, OP might not want life ins past 15 years. If OP saves 10% then OP would need the full boat and go out 20-30 years although some don't really mathematically go much further than the last child finishing undergraduate. My guess is a $1M policy on each of you for 20 years will be plenty. You can also stagger policies if you want more protection the next ten years. The premiums will be peanuts next to income either way for your situation if healthy now.

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cabfranc
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Re: I am thinking about life insurance incorrectly?

Post by cabfranc » Tue Jun 30, 2020 8:16 am

deltaneutral83 wrote:
Tue Jun 30, 2020 8:09 am
Depends on expenses vs savings to me. If OP's household saves 40% of income, OP might not want life ins past 15 years. If OP saves 10% then OP would need the full boat and go out 20-30 years although some don't really mathematically go much further than the last child finishing undergraduate.
We save approximately $100K/year, which includes 401ks, employer match, backdoor Roths, and taxable. Current net work is $1.5M ($1.2M in retirement savings). Obviously, the longer one can put off death and keep saving and paying down the mortgage, the better off one is. For example, if I can "survive" to 55 and keep my current employment situation, I will have a paid off house, funded college, and probably enough money to retire, and the insurance becomes moot. If I only survive today, the situation is not as good but probably fine if spouse keeps working and earning $200k with paid off house.

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Re: I am thinking about life insurance incorrectly?

Post by mbasherp » Tue Jun 30, 2020 8:26 am

I agree with your approach to insurance amounts.
Remember that if something happened to one of you while the children are still minors, there is also the Social Security Survivors benefit available from your record, which you can look up. This would not be insignificant to the survivors budget, even at a higher earning level like you and your spouse.

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Re: I am thinking about life insurance incorrectly?

Post by deltaneutral83 » Tue Jun 30, 2020 8:47 am

cabfranc wrote:
Tue Jun 30, 2020 8:16 am
deltaneutral83 wrote:
Tue Jun 30, 2020 8:09 am
Depends on expenses vs savings to me. If OP's household saves 40% of income, OP might not want life ins past 15 years. If OP saves 10% then OP would need the full boat and go out 20-30 years although some don't really mathematically go much further than the last child finishing undergraduate.
We save approximately $100K/year, which includes 401ks, employer match, backdoor Roths, and taxable. Current net work is $1.5M ($1.2M in retirement savings). Obviously, the longer one can put off death and keep saving and paying down the mortgage, the better off one is. For example, if I can "survive" to 55 and keep my current employment situation, I will have a paid off house, funded college, and probably enough money to retire, and the insurance becomes moot. If I only survive today, the situation is not as good but probably fine if spouse keeps working and earning $200k with paid off house.
I think a million for 20 years for each from today is plenty with your situation. If you want more years for you and spouse, it's not a big deal, you guys savings rate gives plenty of flexibility. When in doubt, go overboard with life ins in terms of years, it's just not worth worrying about a few extra bucks a month in this situation. Keep in mind there are worse things financially than death, such as disability.

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Re: I am thinking about life insurance incorrectly?

Post by Stinky » Tue Jun 30, 2020 9:06 am

cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
You’ve approached this thoughtfully. I think that your approach is fine.

Two suggestions - make sure you and spouse have enough disability income insurance. And re-review your life insurance decision in about 5 years.
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cabfranc
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Re: I am thinking about life insurance incorrectly?

Post by cabfranc » Tue Jun 30, 2020 9:19 am

Stinky wrote:
Tue Jun 30, 2020 9:06 am
cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
You’ve approached this thoughtfully. I think that your approach is fine.

Two suggestions - make sure you and spouse have enough disability income insurance. And re-review your life insurance decision in about 5 years.
Thank you. We just purchased private disability policies for $10K per month for each of us. We had LTD policies through work which did not pay enough and had a coworker who unfortunately needed to make a claim and the insurance company did everything they could to not pay the claim and get the individual to go on SSDI and unfortunately was successful. Once I read the fine print on the employer policies, I ran out to get a private policy as fast as I could.

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Re: I am thinking about life insurance incorrectly?

Post by randomguy » Tue Jun 30, 2020 9:22 am

cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
I thought about 2 cases when picking my number
a) Your spouse dies tomorrow. What is the gap between what your salary provides and the life you want to provide for your kids.
b) what if you both die. How much cash do you want the guardians to have to raise your kids.

1 million seems to be in the range of reasonableness without knowing exact expenses, other savings (i.e. if you have 2 million in the bank already your in a different boat than the people with 0), and flexibility (can you work an extra 5 years, cut lifestyle in acceptable ways,...).

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Re: I am thinking about life insurance incorrectly?

Post by BruDude » Tue Jun 30, 2020 9:44 am

The life foundation has a pretty good needs calculator here - https://lifehappens.org/insurance-overv ... our-needs/

Mess around with it a bit and see what you come up with. Term life insurance is dirt cheap at your age. 7x income is very low on the "rule of thumb" scale - most people use 10-15x income as a baseline. All situations are different. I think the calculator above does a pretty good job.

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Re: I am thinking about life insurance incorrectly?

Post by HomerJ » Tue Jun 30, 2020 9:48 am

cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
"Income" is a poor metric for most financial decisions. "Expenses" are usually more relevant.

In your particular case, $1 million for each of you seems fine. Like you said, you both have high-paying jobs. Paying off the mortgage and funding college is a solid goal.
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Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Tue Jun 30, 2020 9:58 am

Income replacement is for *needed* income.

Why insure for income replacement that is not needed? Your original view was correct.

Your 30-year term was a mistake. You make $400k per year and you don't expect to be FI till 65? Dump your life insurance once you don't need it.

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cabfranc
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Re: I am thinking about life insurance incorrectly?

Post by cabfranc » Tue Jun 30, 2020 10:07 am

gr7070 wrote:
Tue Jun 30, 2020 9:58 am
Income replacement is for *needed* income.

Why insure for income replacement that is not needed? Your original view was correct.

Your 30-year term was a mistake. You make $400k per year and you don't expect to be FI till 65? Dump your life insurance once you don't need it.
I hope to be FI before 65. But until it's a reality I don't feel comfortable accepting it as such. There is no guarantee we will maintain our high incomes to become FI early. I suppose when I am FI, I can cancel the policies.

gr7070
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Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Tue Jun 30, 2020 10:15 am

cabfranc wrote:
Tue Jun 30, 2020 10:07 am
gr7070 wrote:
Tue Jun 30, 2020 9:58 am
Income replacement is for *needed* income.

Why insure for income replacement that is not needed? Your original view was correct.

Your 30-year term was a mistake. You make $400k per year and you don't expect to be FI till 65? Dump your life insurance once you don't need it.
But until it's a reality I don't feel comfortable accepting it as such. There is no guarantee we will maintain our high incomes to become FI early. I suppose when I am FI, I can cancel the policies.
Do you really need a guarantee to make a plan that's based on outrageously reasonable expectations.

To plan around absolutes is the unreasonable approach.

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Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 10:24 am

I personally think the conventional wisdom on here under-insures people’s lives. Imagine this scenario.

- you are alive. You and your spouse both have the jobs you currently do. Something happens where your spouse can’t work or sees a severe reduction in income. It could be a lot of things. She (I’m just gonna assume a she for simplicity, fill in whatever) gets severely injured, a parent gets sick, her industry suffers a downtown (Klangfool constantly beats the drum of not assuming you can work till 65) or maybe she just decides she’d rather she’d stay home full time. Well, in all those cases she’d have your income as backstop against disaster or it would give her the freedom to do what she wants.

- you pass with minimal life insurance then any of the above happens? What’s your contingency plan? By underinsuring you’ve removed her optionality.


Term life is cheap. I for one have enough that my wife won’t have to work and will be able to maintain a reasonable lifestyle, raise our child, and retire. In all reality she’d likely work, at least part time. But I’ve removed that serious stressor in what will already be a stressful time.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

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Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 10:25 am

I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

gr7070
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Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Tue Jun 30, 2020 10:33 am

ScubaHogg wrote:
Tue Jun 30, 2020 10:25 am
I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
Last edited by gr7070 on Tue Jun 30, 2020 10:36 am, edited 1 time in total.

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Re: I am thinking about life insurance incorrectly?

Post by oldfort » Tue Jun 30, 2020 10:35 am

ScubaHogg wrote:
Tue Jun 30, 2020 10:24 am
I personally think the conventional wisdom on here under-insures people’s lives. Imagine this scenario.

- you are alive. You and your spouse both have the jobs you currently do. Something happens where your spouse can’t work or sees a severe reduction in income. It could be a lot of things. She (I’m just gonna assume a she for simplicity, fill in whatever) gets severely injured, a parent gets sick, her industry suffers a downtown (Klangfool constantly beats the drum of not assuming you can work till 65) or maybe she just decides she’d rather she’d stay home full time. Well, in all those cases she’d have your income as backstop against disaster or it would give her the freedom to do what she wants.

- you pass with minimal life insurance then any of the above happens? What’s your contingency plan? By underinsuring you’ve removed her optionality.
What's her optionality now if the OP doesn't die? She can't quit her job and decide to stay home full time for whatever reason unless they're willing to live on half their current income.

oldfort
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Re: I am thinking about life insurance incorrectly?

Post by oldfort » Tue Jun 30, 2020 10:48 am

gr7070 wrote:
Tue Jun 30, 2020 10:33 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:25 am
I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
It can be useful to put events in perspective though. Suppose the OP passed away tomorrow. The average American would look at you strangely if you tried to explain how having a net worth of $2 million at 40 and an income of $200k left you in a tight financial position.

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JoeRetire
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Re: I am thinking about life insurance incorrectly?

Post by JoeRetire » Tue Jun 30, 2020 11:02 am

The correct thinking process for life insurance goes like this - when the insured dies, how do the survivors want to live, and how much money will be required to maintain that lifestyle?
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UnLearnYourself
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Re: I am thinking about life insurance incorrectly?

Post by UnLearnYourself » Tue Jun 30, 2020 11:07 am

My financial advisor brought me through this simple calc by adding up the following to get to a number.

1) Mortgage balance
2) All debts - (auto, student loan, credit card, etc)
3) Public/Private College tuition for my 2 daughters
4) 10x annual salary

In short he suggested I take on a minimum of a $2M term policy for 20-25yrs (I'm 38), and my wife takes out another policy of a minimum $1M for 20-25yrs.

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Re: I am thinking about life insurance incorrectly?

Post by mayday23 » Tue Jun 30, 2020 11:17 am

One valuable thing my financial advisor told me is be careful if my wife dies if I will continue to make the same amount of money.

If your spouse passes, are you going to keep the same job at $170K/year? Will you need to scale down to raise your kid(s) or will you depend on someone else to raise them?

I travel a good amount and no way I could keep my current job if my wife passed and have my kid raised how I’d want them raised.

I always just looked at the math of insurance and income, not the emotional aspect of how myself and my child would live without mom.

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Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 11:55 am

oldfort wrote:
Tue Jun 30, 2020 10:35 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:24 am
I personally think the conventional wisdom on here under-insures people’s lives. Imagine this scenario.

- you are alive. You and your spouse both have the jobs you currently do. Something happens where your spouse can’t work or sees a severe reduction in income. It could be a lot of things. She (I’m just gonna assume a she for simplicity, fill in whatever) gets severely injured, a parent gets sick, her industry suffers a downtown (Klangfool constantly beats the drum of not assuming you can work till 65) or maybe she just decides she’d rather she’d stay home full time. Well, in all those cases she’d have your income as backstop against disaster or it would give her the freedom to do what she wants.

- you pass with minimal life insurance then any of the above happens? What’s your contingency plan? By underinsuring you’ve removed her optionality.
What's her optionality now if the OP doesn't die? She can't quit her job and decide to stay home full time for whatever reason unless they're willing to live on half their current income.
Half is a LOT more than zero
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

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Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 12:00 pm

gr7070 wrote:
Tue Jun 30, 2020 10:33 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:25 am
I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
I’m pointing out that “needed” isn’t a great metric. Several people have said life insurance is there just to replace needed income. I don’t think that’s a good way to think about it. A better metric is how much reasonable income the OP wishes his/her spouse to have in the rest of their life, accounting both for the spouses potential income AND the contingencies if the spouses income doesn’t come to fruition as expected.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

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Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 12:03 pm

mayday23 wrote:
Tue Jun 30, 2020 11:17 am

I travel a good amount and no way I could keep my current job if my wife passed and have my kid raised how I’d want them raised.

I always just looked at the math of insurance and income, not the emotional aspect of how myself and my child would live without mom.
That’s a good point too. I also travel a lot and would basically have to quit my job if my spouse passed, which at best would be a 50% reduction in my income.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

oldfort
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Re: I am thinking about life insurance incorrectly?

Post by oldfort » Tue Jun 30, 2020 1:20 pm

ScubaHogg wrote:
Tue Jun 30, 2020 11:55 am
oldfort wrote:
Tue Jun 30, 2020 10:35 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:24 am
I personally think the conventional wisdom on here under-insures people’s lives. Imagine this scenario.

- you are alive. You and your spouse both have the jobs you currently do. Something happens where your spouse can’t work or sees a severe reduction in income. It could be a lot of things. She (I’m just gonna assume a she for simplicity, fill in whatever) gets severely injured, a parent gets sick, her industry suffers a downtown (Klangfool constantly beats the drum of not assuming you can work till 65) or maybe she just decides she’d rather she’d stay home full time. Well, in all those cases she’d have your income as backstop against disaster or it would give her the freedom to do what she wants.

- you pass with minimal life insurance then any of the above happens? What’s your contingency plan? By underinsuring you’ve removed her optionality.
What's her optionality now if the OP doesn't die? She can't quit her job and decide to stay home full time for whatever reason unless they're willing to live on half their current income.
Half is a LOT more than zero
She wouldn't have zero optionality even then. They have $1.5 million net worth and $1 million life insurance on each. There's certainly people who FIRE at $2.5 million.

oldfort
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Re: I am thinking about life insurance incorrectly?

Post by oldfort » Tue Jun 30, 2020 1:22 pm

What's tricky about the calculation is presumably some expenses would go down if one of you passed away.

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Re: I am thinking about life insurance incorrectly?

Post by Planner01 » Tue Jun 30, 2020 2:28 pm

cabfranc wrote:
Tue Jun 30, 2020 9:19 am
Stinky wrote:
Tue Jun 30, 2020 9:06 am
cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
You’ve approached this thoughtfully. I think that your approach is fine.

Two suggestions - make sure you and spouse have enough disability income insurance. And re-review your life insurance decision in about 5 years.
Thank you. We just purchased private disability policies for $10K per month for each of us. We had LTD policies through work which did not pay enough and had a coworker who unfortunately needed to make a claim and the insurance company did everything they could to not pay the claim and get the individual to go on SSDI and unfortunately was successful. Once I read the fine print on the employer policies, I ran out to get a private policy as fast as I could.
This is something we should consider. What company did you go with?

gr7070
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Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Tue Jun 30, 2020 2:36 pm

ScubaHogg wrote:
Tue Jun 30, 2020 12:00 pm
gr7070 wrote:
Tue Jun 30, 2020 10:33 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:25 am
I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
I’m pointing out that “needed” isn’t a great metric. Several people have said life insurance is there just to replace needed income. I don’t think that’s a good way to think about it. A better metric is how much reasonable income the OP wishes his/her spouse to have in the rest of their life, accounting both for the spouses potential income AND the contingencies if the spouses income doesn’t come to fruition as expected.
And my response was stating that "needed" income has nothing to do with poverty level. It has everything to do with *reasonable* "need". I think the use of the term need on Boglehead's obviously implies that.

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cabfranc
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Re: I am thinking about life insurance incorrectly?

Post by cabfranc » Tue Jun 30, 2020 3:10 pm

Planner01 wrote:
Tue Jun 30, 2020 2:28 pm
cabfranc wrote:
Tue Jun 30, 2020 9:19 am
Stinky wrote:
Tue Jun 30, 2020 9:06 am
cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
You’ve approached this thoughtfully. I think that your approach is fine.

Two suggestions - make sure you and spouse have enough disability income insurance. And re-review your life insurance decision in about 5 years.
Thank you. We just purchased private disability policies for $10K per month for each of us. We had LTD policies through work which did not pay enough and had a coworker who unfortunately needed to make a claim and the insurance company did everything they could to not pay the claim and get the individual to go on SSDI and unfortunately was successful. Once I read the fine print on the employer policies, I ran out to get a private policy as fast as I could.
This is something we should consider. What company did you go with?
MassMutual. Embarking on looking for disability insurance is not a small undertaking. It is far more complicated than life insurance and there are many options (riders) to consider. Also the devil is in the details of each plan. Two plans may look similar on the surface but be very different once you read all of the definitions in the plan.

Planner01
Posts: 194
Joined: Mon Dec 26, 2016 2:44 pm

Re: I am thinking about life insurance incorrectly?

Post by Planner01 » Tue Jun 30, 2020 3:32 pm

cabfranc wrote:
Tue Jun 30, 2020 3:10 pm
Planner01 wrote:
Tue Jun 30, 2020 2:28 pm
cabfranc wrote:
Tue Jun 30, 2020 9:19 am
Stinky wrote:
Tue Jun 30, 2020 9:06 am
cabfranc wrote:
Tue Jun 30, 2020 7:42 am
We are 40 years old with two young children. I make $170K/year and my wife makes $200K/year. At 35 we each bought a $1M term life policy with 30 year terms. The wiki and other websites talk about determining life insurance needs as income replacement. By this metric I feel underinsured. I was not thinking about it as such. My view was to have enough money to pay off the mortgage and pay for the gap between what is saved for college and what is needed. I was thinking that since each spouse has a high income, with a paid off house and paid for college, one spouse could support the children, live comfortably, and save for retirement (albeit only one retirement). Is income replacement more relevant when one spouse doesn't work or the incomes are lopsided, or should we buy more insurance? Maybe $1M ladder to take us to 60, when youngest is out of college?
You’ve approached this thoughtfully. I think that your approach is fine.

Two suggestions - make sure you and spouse have enough disability income insurance. And re-review your life insurance decision in about 5 years.
Thank you. We just purchased private disability policies for $10K per month for each of us. We had LTD policies through work which did not pay enough and had a coworker who unfortunately needed to make a claim and the insurance company did everything they could to not pay the claim and get the individual to go on SSDI and unfortunately was successful. Once I read the fine print on the employer policies, I ran out to get a private policy as fast as I could.
This is something we should consider. What company did you go with?
MassMutual. Embarking on looking for disability insurance is not a small undertaking. It is far more complicated than life insurance and there are many options (riders) to consider. Also the devil is in the details of each plan. Two plans may look similar on the surface but be very different once you read all of the definitions in the plan.
Thank you

MathWizard
Posts: 4151
Joined: Tue Jul 26, 2011 1:35 pm

Re: I am thinking about life insurance incorrectly?

Post by MathWizard » Tue Jun 30, 2020 9:19 pm

SS provides benefits for minors and the surviving parent caring for them. That can help.

You only need to replace expenses for your family to survive.
Re-marriage is also a possibility, as is the surviving spouse working,
so you don't have to cover 20 years of income. Life insurance is also not taxed, so you only have to replace the after-tax portion of income, and any benefits that are lost. (Medical insurance being a big one.)

Losing a spouse is going to be bad emotionally,but also financially.

ScubaHogg
Posts: 523
Joined: Sun Nov 06, 2011 3:02 pm

Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 9:32 pm

gr7070 wrote:
Tue Jun 30, 2020 2:36 pm
ScubaHogg wrote:
Tue Jun 30, 2020 12:00 pm
gr7070 wrote:
Tue Jun 30, 2020 10:33 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:25 am
I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
I’m pointing out that “needed” isn’t a great metric. Several people have said life insurance is there just to replace needed income. I don’t think that’s a good way to think about it. A better metric is how much reasonable income the OP wishes his/her spouse to have in the rest of their life, accounting both for the spouses potential income AND the contingencies if the spouses income doesn’t come to fruition as expected.
And my response was stating that "needed" income has nothing to do with poverty level. It has everything to do with *reasonable* "need". I think the use of the term need on Boglehead's obviously implies that.
Perhaps that’s what folks mean. If so I don’t know why they stress the word “need” so much in their posts by throwing it between asterisks, etc. Seems a distraction.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

ScubaHogg
Posts: 523
Joined: Sun Nov 06, 2011 3:02 pm

Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Tue Jun 30, 2020 9:36 pm

oldfort wrote:
Tue Jun 30, 2020 1:20 pm
ScubaHogg wrote:
Tue Jun 30, 2020 11:55 am
oldfort wrote:
Tue Jun 30, 2020 10:35 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:24 am
I personally think the conventional wisdom on here under-insures people’s lives. Imagine this scenario.

- you are alive. You and your spouse both have the jobs you currently do. Something happens where your spouse can’t work or sees a severe reduction in income. It could be a lot of things. She (I’m just gonna assume a she for simplicity, fill in whatever) gets severely injured, a parent gets sick, her industry suffers a downtown (Klangfool constantly beats the drum of not assuming you can work till 65) or maybe she just decides she’d rather she’d stay home full time. Well, in all those cases she’d have your income as backstop against disaster or it would give her the freedom to do what she wants.

- you pass with minimal life insurance then any of the above happens? What’s your contingency plan? By underinsuring you’ve removed her optionality.
What's her optionality now if the OP doesn't die? She can't quit her job and decide to stay home full time for whatever reason unless they're willing to live on half their current income.
Half is a LOT more than zero
She wouldn't have zero optionality even then. They have $1.5 million net worth and $1 million life insurance on each. There's certainly people who FIRE at $2.5 million.
I never suggested an amount, just a framework for the OP to think about it through (post subject was asking about how to think about life insurance).

But yes, at a current income level of $370k (assuming you want something resembling current lifestyle) $2.5M probably isn’t enough total wealth. Using a rule of thumb 4% WR only gets you to $100k, not even half their current income.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

gr7070
Posts: 1144
Joined: Fri Oct 28, 2011 10:39 am

Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Tue Jun 30, 2020 9:40 pm

ScubaHogg wrote:
Tue Jun 30, 2020 9:32 pm
gr7070 wrote:
Tue Jun 30, 2020 2:36 pm
ScubaHogg wrote:
Tue Jun 30, 2020 12:00 pm
gr7070 wrote:
Tue Jun 30, 2020 10:33 am
ScubaHogg wrote:
Tue Jun 30, 2020 10:25 am
I’ll add life insurance isn’t just for *needed* income. Anything above absolute subsistence level (which is basically a nonissue in the US) isn’t technically “needed.”
No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
I’m pointing out that “needed” isn’t a great metric. Several people have said life insurance is there just to replace needed income. I don’t think that’s a good way to think about it. A better metric is how much reasonable income the OP wishes his/her spouse to have in the rest of their life, accounting both for the spouses potential income AND the contingencies if the spouses income doesn’t come to fruition as expected.
And my response was stating that "needed" income has nothing to do with poverty level. It has everything to do with *reasonable* "need". I think the use of the term need on Boglehead's obviously implies that.
Perhaps that’s what folks mean. If so I don’t know why they stress the word “need” so much in their posts by throwing it between asterisks, etc. Seems a distraction.
The point of the statement for replacing needed income was that one spouse making $200k likely has little need for replacing the other spouse's income. Again, pretty obvious there. Bringing poverty level income into the discussion of two people making $200k each is just silly.

oldfort
Posts: 989
Joined: Mon Mar 02, 2020 8:45 pm

Re: I am thinking about life insurance incorrectly?

Post by oldfort » Tue Jun 30, 2020 10:19 pm

Some of the responses seem to be planning for an absolute worst case: one of you dies, the other never works again, and yet they have to stay living in the VHCOL area for some reason.

gr7070
Posts: 1144
Joined: Fri Oct 28, 2011 10:39 am

Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Tue Jun 30, 2020 11:22 pm

oldfort wrote:
Tue Jun 30, 2020 10:19 pm
Some of the responses seem to be planning for an absolute worst case: one of you dies, the other never works again, and yet they have to stay living in the VHCOL area for some reason.
It's how Boglehead's get 4-year EFs or 30-year terms for someone who will be FI within 10, and how we get comments that those things aren't enough.

ScubaHogg
Posts: 523
Joined: Sun Nov 06, 2011 3:02 pm

Re: I am thinking about life insurance incorrectly?

Post by ScubaHogg » Wed Jul 01, 2020 6:36 am

gr7070 wrote:
Tue Jun 30, 2020 9:40 pm
ScubaHogg wrote:
Tue Jun 30, 2020 9:32 pm
gr7070 wrote:
Tue Jun 30, 2020 2:36 pm
ScubaHogg wrote:
Tue Jun 30, 2020 12:00 pm
gr7070 wrote:
Tue Jun 30, 2020 10:33 am


No one on this board is making plans around poverty level income (well, except for the doctor who takes cold showers and turns off the water in-process). Certainly not recommending one with a 400k income currently to do so.
I’m pointing out that “needed” isn’t a great metric. Several people have said life insurance is there just to replace needed income. I don’t think that’s a good way to think about it. A better metric is how much reasonable income the OP wishes his/her spouse to have in the rest of their life, accounting both for the spouses potential income AND the contingencies if the spouses income doesn’t come to fruition as expected.
And my response was stating that "needed" income has nothing to do with poverty level. It has everything to do with *reasonable* "need". I think the use of the term need on Boglehead's obviously implies that.
Perhaps that’s what folks mean. If so I don’t know why they stress the word “need” so much in their posts by throwing it between asterisks, etc. Seems a distraction.
The point of the statement for replacing needed income was that one spouse making $200k likely has little need for replacing the other spouse's income.
If you read my posts I’m claiming literally the exact opposite of this statement.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

gr7070
Posts: 1144
Joined: Fri Oct 28, 2011 10:39 am

Re: I am thinking about life insurance incorrectly?

Post by gr7070 » Wed Jul 01, 2020 8:12 am

ScubaHogg wrote:
Wed Jul 01, 2020 6:36 am
gr7070 wrote:
Tue Jun 30, 2020 9:40 pm
The point of the statement for replacing needed income was that one spouse making $200k likely has little need for replacing the other spouse's income.
If you read my posts I’m claiming literally the exact opposite of this statement.
Which is why I've been disagreeing with your posts.

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