Life Insurance -- appropriate coverage

[Preston]

I've been putting off life insurance for long enough and I've decided it's time to get this part covered... but I cannot find a good formula to figure out what would be good. Please don't give me a standard Dave Ramsey approach -- I need hard numbers to figure this out.

I am looking for term coverage for two people -- my wife and I. Just setting it up so if something happens to one of us, the other does not have to worry about all the bills and funeral and such. The likelihood of us having kids is pretty slim, but possible. There are medical reasons I do not want to get into, so I have considered that as a slight possibility.

We have a combined income of about $65k, however, I am going to base my estimates on $60k so if we do have a pay cut, we have things in order. Currently that's $30k a piece.

Now, I have figured out that the longer the term the higher the premium, and I could technically just do 30 year terms for us, but then after thinking about it, the numbers didn't seem to make sense. There is a point where we are able to self-insure.

So here we go.

I figure we should carry insurance at least as long as we have the mortgage, which I am estimating that will be paid off within 10-12 years, so we will do a 15 year term for safety most likely.

With our current incomes: (these are estimates, not exact numbers)

in 15 years we will have pulled in $900,000 gross. $81000 in 401k, $90,000 in other retirement. after taxes more around $612,000 take home.

We currently live on $2000 a month - high end estimate of expenses. (That is WITH debt payments and a mortgage). In 15 years that breaks down to $360000 in living expenses (but then again, the mortgage payments make up the biggest chunk of that, so once the mortgage is paid off, it will lessen the outflow significantly).

But this leaves me with ~$250,000 at the end off the term, which would be enough to live off for 10 years.

So I do not want to overdo life insurance. Would it be better to shorten it to 10 years? Or what would be a good amount?

Wife says she thinks $250k for 15 years would work, but I the more I think about it might be overkill.

The mortgage currently is $85k, and figuring these numbers it doesn't look so big anymore...

[Greebo]

The "standard Dave Ramsey approach" is done a particular way for a reason - it covers all the bases.

The reason one gets term life insurance is, as you are looking at, to make sure the other family member(s) are covered should the worst happen. It's not to make them rich - it's to provide for what you or your wife *used* to provide while they were living.

That's why he says 20 year term life at 10x each earner's annual financial value to the household. That can mean income producer or income *defender* (if one person stays home and raises the kids, there's a cost to replace that function). So, lets look at your specifics:

We have a combined income of about $65k, however, I am going to base my estimates on $60k so if we do have a pay cut, we have things in order. Currently that's $30k a piece.

The base line you should be looking at then is 300k coverage each.

Now, I have figured out that the longer the term the higher the premium, and I could technically just do 30 year terms for us, but then after thinking about it, the numbers didn't seem to make sense. There is a point where we are able to self-insure.

This does get variable - for example if you figure that in 10 years you will be self-insured, then to allow for variables, go for 15. If you think it'll be about 15 years, do 20, and so forth.

I figure we should carry insurance at least as long as we have the mortgage, which I am estimating that will be paid off within 10-12 years, so we will do a 15 year term for safety most likely.

Good thinking

in 15 years we will have pulled in $900,000 gross. $81000 in 401k, $90,000 in other retirement. after taxes more around $612,000 take home.

This really isn't relevant - first of all you're assuming your income will never go up - which in 15 years is unlikely. Secondly, you're looking at a cumulative sum, but with life insurance the payout is lump sum, so if you kick it in year 1, your wife gets 300k, all at once. When you factor in your expenses of 2k a month, since your incomes are equal, your wife needs 1,000 a month to cover expenses. That's $12k a year, or 4% of the 300k. Invested wisely in good growth stock mutual funds, your wife should have no problem drawing 1k a month from the 300k and the 300k should, over the long haul, beat inflation and continue to grow.

We currently live on $2000 a month - high end estimate of expenses. (That is WITH debt payments and a mortgage). In 15 years that breaks down to $360000 in living expenses (but then again, the mortgage payments make up the biggest chunk of that, so once the mortgage is paid off, it will lessen the outflow significantly).

Your mortgage is 85k.

Lets say you kick it and the wife collects 300k. She uses 85k to pay off the mortgage, leaving 215k. If she then draws $717 a month (4%), and inflation is 4%, and the 215 is invested wisely and averages 8% a year, her $215k will supply her $717 a month for life. With her income, plus her eventual retirement, plus your remaining retirement - will that be enough?

But this leaves me with ~$250,000 at the end off the term, which would be enough to live off for 10 years.

It sounds like you're treating this like a straight division problem - it is not. You want the insurance payout to provide ample seed money so that the surviving spouse can replace the deceased's income, and still see the nest egg grow after inflation.

So I do not want to overdo life insurance. Would it be better to shorten it to 10 years? Or what would be a good amount?

Wife says she thinks $250k for 15 years would work, but I the more I think about it might be overkill.

The mortgage currently is $85k, and figuring these numbers it doesn't look so big anymore...

Based on the information above - and PROVIDED that in 15 years you'll be ready to retire ANYWAY, I would go for $400k each on 15 year term.

I'm going a bit higher, because I'm wanting you or your spouse to be more than just getting by should the other pass - I want neither of you to have to worry should the worst happen. With 400k, if the mortgage is paid off, that leaves 315k, and then you can draw $1k a month for life if the remaining $315k is invested wisely. That plus retirement, social insecurity, and the spouses retirement should guarantee that you or your spouse are set comfortably. It isn't exorbitant, but you aren't forced to buy recycled food each month to keep in budget either.

[Preston]

If it matters.

We are both 30.

slightly overweight, but losing it.

She smokes, although I am nagging her to quit.

I think it may be worthwhile to do a 10 year policy then in 10 years re-think our game plan? I think there will be a significant difference between now and then.

I honestly hate this, this is the hardest financial thing I think I've ever had to do.

[ml2620]

Preston, we just went through this last month, with far less thought than you (I was hospitalized with pregnancy complications). One thing we talked about were living and lifestyle adjustments we would make if one of us died. I would sell our farm and move closer to my family, he would keep the farm.

Think about stuff like that too, although as usual greebs has all the nitty gritty for you.

We finally selected 600K 25 year term for each of us. It honestly came down to what we could afford monthly, we will likely increase that as our financial situation improves, as we have a big mortgage and an as yet unborn child.

[Greebo]

If it matters.

We are both 30.

slightly overweight, but losing it.

She smokes, although I am nagging her to quit.

I think it may be worthwhile to do a 10 year policy then in 10 years re-think our game plan? I think there will be a significant difference between now and then.

I honestly hate this, this is the hardest financial thing I think I've ever had to do.

The older you get, the more expensive coverage costs to start. Better to lock in a 15 or even a 20 now than to do 10 now and 10 later.

If this costs you more than $50/month total, I'll be surprised. My $1M policy that we started at age 39 while I weighed 300 lbs is only $125/month and you're almost 10 years younger, more fit, and going for less overall.

[ml2620]

If this costs you more than $50/month total, I'll be surprised. My $1M policy that we started at age 39 while I weighed 300 lbs is only $125/month and you're almost 10 years younger, more fit, and going for less overall.

Oh, Greebo, they gave you a discount because, obviously, most of that 300 lbs. was your big, smart BRAIN, and you were too much of an analyzer to run out and do something STUPID.

[Greebo]

Oh, Greebo, they gave you a discount because, obviously, most of that 300 lbs. was your big, smart BRAIN, and you were too much of an analyzer to run out and do something STUPID.

I'm not sure if this is intended as a compliment or a passive aggressive remark...

... so much for my brain.

[ml2620]

It was a compliment. I only make passive agressive compliments to my husband.

[Greebo]

It was a compliment. I only make passive agressive compliments to my husband.

Not touching that one!