Life Insurance Laddering Question

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
ggrmv722
Posts: 16
Joined: Wed Jan 01, 2020 8:59 pm

Life Insurance Laddering Question

Post by ggrmv722 »

Hi All- I'm looking to purchase term life insurance policies and was hoping for some input on choosing between 3 options.

Myself:
Income $100k
29 years old

Spouse:
Income $40k
27 years old

- no children yet, but looking to have a child in the next year, and then will try for 1-2 more soon after
- no house yet, but looking to purchase a roughly $600k house in the next 3 years or so with 20% down
- we currently have $50K in student debt with a very low interest rate, no other debt
- we have roughly $125K in savings/investments and another $40K in 401k savings
- $70K in annual expenses, will mostl likely rise to ~$100-110K once we have children & mortage
- only other life insurance policy we currently have is $50K each through our employers

Option 1:
$1MM 10 year policy, $21 a month
$2MM 20 year policy, $62 a month
$1MM 30 year policy, $55 a month
--> total cost of $37K over 30 years, would provide my spouse $4m in the first 10 years, $3m in years 11-20, $1m in years 21-30

Option 2:
$1MM 10 year policy, $21 a month
$2MM 30 year policy, $104 a month
--> total cost of $40K over 30 years, would provide my spouse $3m in the first 10 years, $2m in years 11-30

Option 3:
$1MM 10 year policy, $21 a month
$1MM 20 year policy, $34 a month
$1MM 30 year policy, $55 a month
--> total cost of $30K over 30 years, would provide my spouse $3m in the first 10 years, $2m in years 11-20, $1m in years 21-30

I am leaning toward option 1 as we expect to achieve FI in the next 20 years and therefore having coverage in years 21-30 is not too important. Option 1 also provides a good amount of coverage in the first 20 years in case something happens before achieve FI. Option 3 would by my second choice here but am concerned it wouldn't provide enough money in the first 20 years for mortgage, college, etc.
User avatar
Stinky
Posts: 5807
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Life Insurance Laddering Question

Post by Stinky »

ggrmv722 wrote: Fri Nov 20, 2020 1:37 pm Hi All- I'm looking to purchase term life insurance policies and was hoping for some input on choosing between 3 options.

Myself:
Income $100k
29 years old

Spouse:
Income $40k
27 years old

- no children yet, but looking to have a child in the next year, and then will try for 1-2 more soon after
- no house yet, but looking to purchase a roughly $600k house in the next 3 years or so with 20% down
- we currently have $50K in student debt with a very low interest rate, no other debt
- we have roughly $125K in savings/investments and another $40K in 401k savings
- $70K in annual expenses, will mostl likely rise to ~$100-110K once we have children & mortage
- only other life insurance policy we currently have is $50K each through our employers

Option 1:
$1MM 10 year policy, $21 a month
$2MM 20 year policy, $62 a month
$1MM 30 year policy, $55 a month
--> total cost of $37K over 30 years, would provide my spouse $4m in the first 10 years, $3m in years 11-20, $1m in years 21-30

Option 2:
$1MM 10 year policy, $21 a month
$2MM 30 year policy, $104 a month
--> total cost of $40K over 30 years, would provide my spouse $3m in the first 10 years, $2m in years 11-30

Option 3:
$1MM 10 year policy, $21 a month
$1MM 20 year policy, $34 a month
$1MM 30 year policy, $55 a month
--> total cost of $30K over 30 years, would provide my spouse $3m in the first 10 years, $2m in years 11-20, $1m in years 21-30

I am leaning toward option 1 as we expect to achieve FI in the next 20 years and therefore having coverage in years 21-30 is not too important. Option 1 also provides a good amount of coverage in the first 20 years in case something happens before achieve FI. Option 3 would by my second choice here but am concerned it wouldn't provide enough money in the first 20 years for mortgage, college, etc.
I think that with a $100k annual income, you're looking to purchase too much insurance. I doubt that an insurance company would issue $3 million on your life, much less $4 million. That's just too disproportionate to your income.

A typical rule of thumb is "10 times income". That would put you at $1 million. That might be too conservative, but I expect that the maximum that you can get on your life is about 20 X income, or $2 million. (Maybe somebody with more knowledge can correct me).

If you were to buy two policies, one of them should be a 20 year policy. I might make the other one a 10 year policy, and then plan to add another policy if you do have a third kiddo a few years down the road.

What about insurance on your wife? Even if she ceases working when you have kiddos, you will suffer a financial loss if she dies before the kiddos are out of the nest. Maybe buy a $250k or $500k 15-year term policy on her life.
It's a GREAT day to be alive - Travis Tritt
Topic Author
ggrmv722
Posts: 16
Joined: Wed Jan 01, 2020 8:59 pm

Re: Life Insurance Laddering Question

Post by ggrmv722 »

Stinky wrote: Fri Nov 20, 2020 4:34 pm
ggrmv722 wrote: Fri Nov 20, 2020 1:37 pm Hi All- I'm looking to purchase term life insurance policies and was hoping for some input on choosing between 3 options.

Myself:
Income $100k
29 years old

Spouse:
Income $40k
27 years old

- no children yet, but looking to have a child in the next year, and then will try for 1-2 more soon after
- no house yet, but looking to purchase a roughly $600k house in the next 3 years or so with 20% down
- we currently have $50K in student debt with a very low interest rate, no other debt
- we have roughly $125K in savings/investments and another $40K in 401k savings
- $70K in annual expenses, will mostl likely rise to ~$100-110K once we have children & mortage
- only other life insurance policy we currently have is $50K each through our employers

Option 1:
$1MM 10 year policy, $21 a month
$2MM 20 year policy, $62 a month
$1MM 30 year policy, $55 a month
--> total cost of $37K over 30 years, would provide my spouse $4m in the first 10 years, $3m in years 11-20, $1m in years 21-30

Option 2:
$1MM 10 year policy, $21 a month
$2MM 30 year policy, $104 a month
--> total cost of $40K over 30 years, would provide my spouse $3m in the first 10 years, $2m in years 11-30

Option 3:
$1MM 10 year policy, $21 a month
$1MM 20 year policy, $34 a month
$1MM 30 year policy, $55 a month
--> total cost of $30K over 30 years, would provide my spouse $3m in the first 10 years, $2m in years 11-20, $1m in years 21-30

I am leaning toward option 1 as we expect to achieve FI in the next 20 years and therefore having coverage in years 21-30 is not too important. Option 1 also provides a good amount of coverage in the first 20 years in case something happens before achieve FI. Option 3 would by my second choice here but am concerned it wouldn't provide enough money in the first 20 years for mortgage, college, etc.
I think that with a $100k annual income, you're looking to purchase too much insurance. I doubt that an insurance company would issue $3 million on your life, much less $4 million. That's just too disproportionate to your income.

A typical rule of thumb is "10 times income". That would put you at $1 million. That might be too conservative, but I expect that the maximum that you can get on your life is about 20 X income, or $2 million. (Maybe somebody with more knowledge can correct me).

If you were to buy two policies, one of them should be a 20 year policy. I might make the other one a 10 year policy, and then plan to add another policy if you do have a third kiddo a few years down the road.

What about insurance on your wife? Even if she ceases working when you have kiddos, you will suffer a financial loss if she dies before the kiddos are out of the nest. Maybe buy a $250k or $500k 15-year term policy on her life.
Oh wow, I would have thought that $2m would not be nearly enough especially because I’m in a HCOL area..mortgage and kids can add up quick and I worry about the gap between our annual expenses and my spouses income. Thanks for the info though, definitely helpful to consider
User avatar
Stinky
Posts: 5807
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Life Insurance Laddering Question

Post by Stinky »

ggrmv722 wrote: Fri Nov 20, 2020 7:04 pm Oh wow, I would have thought that $2m would not be nearly enough especially because I’m in a HCOL area..mortgage and kids can add up quick and I worry about the gap between our annual expenses and my spouses income. Thanks for the info though, definitely helpful to consider
You may live in a HCOL area - but the life insurance company is insuring your income, not your cost of living.

I don’t believe that any life insurer would issue you policies that take you to 30x or 40x income.
It's a GREAT day to be alive - Travis Tritt
BruDude
Posts: 3454
Joined: Thu Dec 30, 2010 12:28 am
Location: Las Vegas

Re: Life Insurance Laddering Question

Post by BruDude »

Some companies will do 30-35x income. You might be able to swing 40x with a good cover letter from the agent explaining that you’re in a HCOL area, but that’s stretching it. Banner Life allows you to ladder it within a single policy with a single policy fee instead of paying 3 separate fees.
sport
Posts: 9634
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Life Insurance Laddering Question

Post by sport »

You might want to price your options with annual premiums instead of monthly. It might be less expensive.
User avatar
Stinky
Posts: 5807
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Life Insurance Laddering Question

Post by Stinky »

BruDude wrote: Fri Nov 20, 2020 9:30 pm Some companies will do 30-35x income. You might be able to swing 40x with a good cover letter from the agent explaining that you’re in a HCOL area, but that’s stretching it. Banner Life allows you to ladder it within a single policy with a single policy fee instead of paying 3 separate fees.
BruDude is an insurance agent; I am not. Follow his advice.

Paying only a single policy fee could be a significant savings.
It's a GREAT day to be alive - Travis Tritt
Topic Author
ggrmv722
Posts: 16
Joined: Wed Jan 01, 2020 8:59 pm

Re: Life Insurance Laddering Question

Post by ggrmv722 »

BruDude wrote: Fri Nov 20, 2020 9:30 pm Some companies will do 30-35x income. You might be able to swing 40x with a good cover letter from the agent explaining that you’re in a HCOL area, but that’s stretching it. Banner Life allows you to ladder it within a single policy with a single policy fee instead of paying 3 separate fees.
Thanks for the good info. Do you think I’m considering too much life insurance? Also, would a single policy fee represent a good amount of savings?
lessismore22
Posts: 178
Joined: Sun Jul 01, 2018 8:02 pm
Location: USA

Re: Life Insurance Laddering Question

Post by lessismore22 »

You're fine with a 2M 20 yr Term.
BruDude
Posts: 3454
Joined: Thu Dec 30, 2010 12:28 am
Location: Las Vegas

Re: Life Insurance Laddering Question

Post by BruDude »

ggrmv722 wrote: Fri Nov 20, 2020 10:34 pm
BruDude wrote: Fri Nov 20, 2020 9:30 pm Some companies will do 30-35x income. You might be able to swing 40x with a good cover letter from the agent explaining that you’re in a HCOL area, but that’s stretching it. Banner Life allows you to ladder it within a single policy with a single policy fee instead of paying 3 separate fees.
Thanks for the good info. Do you think I’m considering too much life insurance? Also, would a single policy fee represent a good amount of savings?
40x income is a lot. If your income will be increasing substantially in the near future then no. $2-3M for 20-30 years seems reasonable enough to me. Policy fees are usually in the range of $50-200 per policy, varies by company.
User avatar
cchrissyy
Posts: 206
Joined: Fri May 05, 2017 10:35 pm

Re: Life Insurance Laddering Question

Post by cchrissyy »

Maybe you aren't considering monthly income from social security survivor benefits to your spouse and kids. Log in to your file on the official site for the exact amount. It should be very helpful in covering basic expenses.
Topic Author
ggrmv722
Posts: 16
Joined: Wed Jan 01, 2020 8:59 pm

Re: Life Insurance Laddering Question

Post by ggrmv722 »

BruDude wrote: Sat Nov 21, 2020 1:16 am
ggrmv722 wrote: Fri Nov 20, 2020 10:34 pm
BruDude wrote: Fri Nov 20, 2020 9:30 pm Some companies will do 30-35x income. You might be able to swing 40x with a good cover letter from the agent explaining that you’re in a HCOL area, but that’s stretching it. Banner Life allows you to ladder it within a single policy with a single policy fee instead of paying 3 separate fees.
Thanks for the good info. Do you think I’m considering too much life insurance? Also, would a single policy fee represent a good amount of savings?
40x income is a lot. If your income will be increasing substantially in the near future then no. $2-3M for 20-30 years seems reasonable enough to me. Policy fees are usually in the range of $50-200 per policy, varies by company.
I do expect my income to increase by 50-80% in the next 3-5 years so I could just get whatever I can now and buy more then if needed, albeit at higher rates.
User avatar
Stinky
Posts: 5807
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Life Insurance Laddering Question

Post by Stinky »

ggrmv722 wrote: Sat Nov 21, 2020 9:00 am I do expect my income to increase by 50-80% in the next 3-5 years so I could just get whatever I can now and buy more then if needed, albeit at higher rates.
If you haven’t already, go online to zander.com or a similar site to get quotes from a variety of companies.

You say in your original post that you’re 29 years old. I think that if you ask for a quote for a person a few years older, you’ll find that being a little older won’t materially increase the price you pay for coverage.
It's a GREAT day to be alive - Travis Tritt
BogleFan510
Posts: 195
Joined: Tue Aug 04, 2020 2:13 pm

Re: Life Insurance Laddering Question

Post by BogleFan510 »

Im not a big fan of life insurance until you actually need it. Maybe reevaluate when you actually have children to support. Rates will not move much at your age. Do you have other safety nets like parents with wealth?
Post Reply