One of my 2013 goals was to get life insurance. I had a pretty hefty life insurance policy with my old employer, but now that I’m self employed, I don’t have any life insurance coverage at all. However, my situation is a bit unique and I’m not sure if I really need life insurance. That’s why I have been procrastinating. I really need to deal with this before I turn 40 though. Jeff Rose from Good Financial Cents and Life Insurance By Jeff is going to help me figure out if I need life insurance and how much.
I have been primarily looking at term life insurance. This is the original and simplest form of life insurance. It provides coverage for a fixed rate of payment over a period of time. For example, I can get a $250,000 policy for 20 years. The payment will be fixed at say – $20/month for 20 years. If I pass away with in this time, then the insurance company will pay Mrs. RB40. Term life insurance is the least expensive way to purchase life insurance.
Here is the summary of our current situation
Both Mr. and Mrs. RB40 are 39. Baby RB40 is 2 years old.
My current self employment income: about $1,500/month
Social Security survivor benefit: $1,961/month for Baby RB40 up until 18 years old AND $1,961/month for Mrs. RB40 until our kid is 16 year old.
Hmmm… It’s always hard to swallow when you’re worth more dead than alive. Mrs. RB40 will have to pay for daycare and probably more household help, but it looks to me like the social security benefit should cover the extra cost.
Primary home mortgage: owe about $250,000.
Mrs. RB40 can sell off our rentals and use the proceeds to pay off the primary home.
Mrs. RB40 can use part of my retirement fund to pay for Baby RB40’s college if needed. I have about 500k in my retirement fund now.
Mrs. RB40’s current job has a pension attached and she also contributes to her 401(k) plan. She plans to continue working for at least another 15 years. I’m pretty sure she would be fine with retirement saving.
Aging parents – I’m pretty sure my brothers can take care of my parents if I’m not around.
Commentary from Jeff Rose
First, I want to say thank you for Joe for coming to me with his life insurance questions. I’m still amazed at the amounts of misinformation on the web regarding life insurance that detours families from getting it. I’ve personally seen too many examples where not having a cheap term life policy created a financial burden for a family.
1. Do I need life insurance?
My initial thought is yes and here’s why. Having the rentals to pay off the home is huge. Great way to diversify your investments!
Most likely if something where to happen to you, Mrs. RB40 wouldn’t feel compelled to have to pay off the home immediately; so that’s not a big deal. While I’m not expert in real estate, I would have to assume that “selling off the rentals” is a bit more involved than making a simple phone call.
To me what life insurance would mean for Mrs. RB40 is a financial safety net to not have to have to make any rash decisions on selling rentals, paying off the home or trying to figure out how she’s going to pay for Baby RB40′s college tuition.
When I decided to purchase my term life insurance policy, my goals were the following:
- I didn’t want my wife to go back to work.
- I wanted my wife to have enough cash flow to give her the time she needed to make important decisions regarding my financial planning practice, our websites, our home, our 3 boys and any other financial matters.
<Joe follow up> Our goals are a bit different here. Mrs. RB40 will continue to work so my main concern is to make sure they have good cash flow if they have to pay for daycare. We also only have 1 kid and I think that makes a big difference. A life insurance payout would give them extra time to adjust though.
2. If so how much life insurance should I get?
That’s the fun question! And also tough. Quick math would say add up all your debts and purchase that face amount. I think your situation is a bit more unique.
Here are a couple of things/questions you should consider:
- Does Mrs. RB40 want your child to go daycare if something happened to you or would she rather be a stay at home mom? <Joe> Mrs. RB40 will continue to work and Baby RB40 will go to full time daycare/preschool.
- You mentioned your self-employment income is $1,500/mo. Have you considered how much more you save per month because you have the ability to be a stay at home dad? How much more would Mrs. RB40 need per month to make up for that shortfall? <Joe> Full time day care will cost about $1,250. The additional income from social security survivor benefit should cover the additional expenses.
- Does Mrs. RB40 want to manage the rental properties if something happened to you? <Joe> No, she does not want to deal with rental properties. I think she should sell them off ASAP if I’m not around.
- What would happen if something happened to Mrs. RB40? Does she have any life insurance coverage to replace her salary? <Joe> She has life insurance and we should also get some Social Security survivor benefit. I’m sure we would be fine. If both of us are gone, then I don’t know…
After you answer those questions and then pinpoint some numbers, you can use this free term life insurance calculator determine how much you actually need to purchase.
<Joe follow up> It looks to me like social security survivor benefit will replace my income and pay for childcare. The calculator doesn’t work well for my situation.
3. Is term life insurance the right choice? What term should I get? 20 years?
For your situation (and for many situations) term life insurance makes a lot of sense. Getting a term policy is super easy and very affordable. A healthy 40 year-old male can expect to pay around $18/mo for a $250,000 20 year term policy. A $500,000 policy would only increase to $30/mo. A healthy female can expect to pay less with their rates running at $16/mo and $27/mo respectively for the same amounts of coverage.
In your case, I think 20 years makes a lot of sense stretching you out until normal retirement age. I will say that we have many people well into their 60′s seeking life insurance coverage. While the price jump from your 20′s to your 30′s is not that steep, going from your 50′s t0 60′s is. I never imagined there would be that many seniors buying life insurance, but I guess when you think about how much longer were living nowadays it makes sense.
I say all this because sometimes I’ll have people at least consider taking out a 30 year term policy for this reason. It will obviously cost more in the beginning, but you can also decide to cancel it (just stop paying) at anytime you wish.
4. Should I consider whole life, universal life, and other alternatives?
Personally, I’m not a big fan of other types of life insurance for income protection. Curious on how much a whole life costs vs. term life, I ran an illustration on myself for $250,000. The 30 year term policy costs me $252 per year compared to $3,440 for the whole life. Yowzers!
Now I do realize I’m not comparing apples to apples here, it’s still a good demonstration of how inexpensive term life insurance really is.
Universal life insurance has it pros and cons, but for the most part would not apply to your situation. This type of insurance could make sense for those unable to make contributions to their Roth IRA. This is strategy that I’ve been considering, but haven’t pulled the trigger yet.
If you’re still undecided on whether you need life insurance coverage for your family, I hope this article at least gets your wheels spinning on the topic. Joe’s situation is a bit more unique and requires a bit more planning and thought. Either way, I hope that demonstrating on how inexpensive it is to have some sort of coverage on your family extinguishes any doubts that you can’t afford it.
<Joe follow up> I’m still a bit undecided, but at least now I know I don’t need a big life insurance policy. Even if I don’t have life insurance, my family should be able to maintain their standard of living until Baby RB40 is a grown up. We also have 18 months of living expense in cash equivalent (cash and I Bonds) so that should help with funeral expenses and absorb the shock of losing a stay at home dad.
Over the next few weeks, I’ll get a quote for a 20 years term life insurance policy and figure out if we’ll pull the trigger. I’m pretty sure a $250,000 policy is plenty in my situation. Man, thinking about life insurance is depressing. That’s probably why most people just put it off until it’s too late.
What do you think? Would you get life insurance in my situation? I would love to get some input from everyone.