Article

When to Get or Drop Life Insurance

by
Zacc Call

Listen to this episode!

When to Get or Drop Life Insurance

“Yeah, I killed him. I killed him for the money and a woman!”

Life insurance is about the least interesting thing in the world, but not in the 1944 movie “Double Indemnity” which tells the story of an affair and a life insurance clause the doubles the death benefit if the insured dies of an accident.


If you really want to go down a strange rabbit hole of movie genres, try “8 great suspense movies that revolve around life insurance (seriously)”


However, can we trust this list if it does not include the Chevy Chase flick from 1985 “Fletch”?

When to get life insurance

Think of it this way, what financial problems does your death create?


Are you married?

Your spouse needs to have funds to pay for a funeral. Listen to episode 46 with funeral home director Matt Russon to learn about The Cost of Dying. For now, assume $15K-$20K. It would also be nice to leave some money for additional expenses for example, what if your spouse chooses to move or needs to take some bereavement time off work?


Do you have a mortgage?

Be careful of leaving your loved ones who are staying with a large monthly payment. Recognize that if no one needs the home when you die (no spouse or kids living there), you do not need insurance to pay off the mortgage. The executor of your estate will sell the home and pay off the debt with your equity.


Does your spouse or children need your income?

You need to recreate any income your surviving spouse cannot create on his/her own. Multiply this income number by 15-20 times. Remember that life insurance is typically tax free. Your loved ones will not need as much income as you earn before taxes. I would have told you to multiply by 25 if that were the case. Remember that Social Security will pay some to your spouse if you have children under the age of 16. Social Security will also pay some to your children until they are 18, or 19 if he/she is still in school full time. There is a family maximum so assume they will only get about $1,500 to $4,000 as a group during that time. I know that is a wide range, but your earning will cause that to vary.


The Inadequacy of a LIFE-TERM

See what I did there? I worked for a large company who offered extremely low employer assisted life insurance rates. I was paying about $80 per month for about $1,700,000 of term life insurance. I figured that would be plenty. After 8.5 years, it was time to leave this employer for a new & better opportunity. I wouldn’t be writing, podcasting, and building our advisory team had I stayed.

During that 8.5-year window I was diagnosed with and treated for thyroid cancer. I was told my life insurance was “portable”. This means I could leave my job and I would be able to keep the life insurance in place without having to undergo additional health screening. I received the paperwork to continue the plan and learned the cost would increase to over $1,100 per month. I was devastated! I was taking what I thought was the biggest career risk of my life and heading to a startup firm. There was no 401(k) or company healthcare plan. My monthly premiums for healthcare were jumping to $1,200 per month on the private exchange. Those were some anxiety filled evenings and tough conversations with my wife. She was supportive, but I cannot express the level of inadequacy I felt not being able to support her if I died.

Since the initial surgery in 2010, I was back in 2014 and 2019. Normally, you could wait for 10 years and the insurance companies would basically say “okay, it has been long enough, there is not much risk of you dying of cancer, we’ll insure you.” However, every recurrence resets the waiting clock. I would like to pretend I do not feel some level of inadequacy now, but I would be lying. This story and more about finances for dummies is in our most listened to episode: “Finances for Dummies…I mean Millennials”.

Here is my life as examples:

I am 36 now. This is the first 4 to 5 years of my married life.

Zacc & Michelle were married (both age 22). Yes, we were basically babies.
Life insurance = $50k on each of us. With this amount we are just hoping to solve for end-of-life expenses, moving costs, and time off work.

Zacc & Michelle buy a townhome (age 24). Mortgage $165K. Each making the same amount of money. Life insurance should be about $200K for each of us to solve for the previously mentioned items and to pay off the mortgage.

Zacc & Michelle have a baby. Zacc is now making about $75,000 per year, Michelle is making $10,000 per year working part time & staying home with the baby more. (age 24)

Still $200k on each of us for the mortgage & end of life expenses. Now add more to recreate about $50,000 of annual income if Zacc dies. $50,000 X 15 = $750,000. This is a minimum. I did not feel comfortable at that level and pushed it up to about $1,000,000. Remember, Social Security would pay my spouse about $20K-$30K/year. She wouldn’t have been rich, but it would have worked.

Zacc & Michelle have twins, move, and buy a new home. Keep the old townhome as rental. Michelle stops working. Zacc makes more money. Michelle has a brain tumor (benign, now okay). Zacc finishes degree. (all age 26).  Holy Smokes!

The new mortgage was about $300,000.  Income was about $150,000/year.   $150K minus Social Security help = $125K.  Taxes took a chunk and I was saving quite a bit so I really only needed to reproduce about $80K after taxes.  $80K X 15 = $1,200,000.  Let’s add the amount to cover the mortgage of $300,000 giving us a final number of $1,500,000.  I went with $1,700,000 to account for some inflation over time.  My mistake was setting it all up under my employer plan.  $1,200,000 will not produce $80,000 of income per year.  It is typically not safe to assume you can always withdraw 6% to 7% of your portfolio per year.  In this calculation, I was assuming some Child & Caregiver Social Security benefits would be available.  When the kids are older causing these Social Security benefits to go away, I assumed my wife would be able to get a job paying at least $30,000 per year.

We all try not to experience lifestyle creep, but in moderation, it is okay to spend a little more as your earn more.  Assuming I had never had cancer, I would be able to add more life insurance.  Of course I now look back with regret.  I wish I had purchased more life insurance and from multiple sources.

When to drop life insurance

My retiree clients ask, “should I keep this life insurance in retirement?” The short answer is: Do you have enough assets to be your own life insurance? If so, then drop it.

However, the full process is to review your goals. How nice do you want to be to your kids? If you do not feel the need to leave them with a lot of money then it is time to drop your coverage. Do you have a mortgage? Do you have enough assets that your spouse will have the needed income if you die? Do you have other parties besides your spouse that will be left in financial ruin if you die? (think disabled child) If the answer is “no” to all these questions, you are done. Lastly, do not drop your permanent life insurance without at least considering selling it to a company who will buy it. Yes, that happens. Yes, people walk away from policies that have value all the time.

Summary

Prepare yourself for the unthinkable. The unthinkable becomes a reality for a few of us. Have your own life insurance disconnected from your employment. Maybe add extra if your employment life insurance is a great deal. Be ready to lose or drop that employer sponsored amount if you need a career change.


Add life insurance when you need it, drop it when you do not. Call me or one of the other advisors on our team and we will talk through it.

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