Here's an email I recently received from a reader:
How much life insurance do my wife and I need?
My spouse and I are in our mid-50s, we both own our own businesses. Currently, my wife’s business throw’s off about $250k, mine about $50k, total income~$300k. This should remain steady for the next 10 years, anyway. We are in the healthcare industry, not medical people (i.e., MDs) but niche service providers to private industry.
We started our family of 3 boys late in life, our first born when we were ~ 39 years old and our last ~ 47 years old.
- Liquid non-qualified (cash, stocks, mutual funds): $238K
- Liquid qualified (IRA, 401k, HSA): $456k
- Real Estate home: $500k
- Real Estate other rentals, offices: $1,300,000
- Home Mortgage: $325k
- Real Estate Rental (residential): $236k
- No other debts.
FMV of businesses NOT included above.
I currently have $1,000,000 term policy, due to renew next month….thinking about 20 year term, same amount. My wife currently has $1,500,000 term, due to renew next month…thinking about 20 year term, plus a boost to $2,000,000 from $1,500,000.
Question is how much should we insure for?
We don’t see retiring for at least another 20 years as we prefer, at this time, to stay active and work in our businesses.
College funding is up in the air, it is not certain whether our kids will even go to college or not, therefore, we have chosen not to establish any 529 plans, I am not sure these are great savings vehicles anyway given our investment preference to real estate.
If I were to kick before 20 years, a majority of the proceeds would likely be “rocking chair” money, i.e., generating passive income.If my wife goes before 20 years, that is a different matter for the following reasons:
- The business is well established, yet, she is the face of the business.
- Having said that, we are beginning to, FINALLY, get a really good management team in place that will allow the business to grow and groom some younger people to start taking a more active leadership role that will ultimately help in succession planning. Our kids are still too young and it is more likely than not that they will have little interest in the business, (although, you never know!) due to the technical nature. Although, it really boils down to excellent management/customer service skills, the technical side is a plus….but alone would be a bust.
- The business is well diversified, i.e., no customer makes up more than 10% of revenue.
Does the guideline of insuring for ten times income still apply? What else should we consider when setting the amount and term for life insurance -- especially on my wife. I thought that perhaps I should “ladder” my wife’s insurance, say start with 4 separate $500k policies and then let $500k expire every 5 years? With the thought that every 5 years that passes our own assets continue to grow as well as my wife’s business becomes more independent of her skills and knowledge by bringing up younger people and advancing them to higher leadership roles.
What's your advice for him?