Help a Reader: How Much Life Insurance to Buy

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.

Assets:

• 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

Debts:

• 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?

Comments

[Steve]

I think laddering is a good idea for both of you, as a 20 year term at that age is very expensive. And if her business is really "throwing off" $250K in income (as opposed to much of that money getting re-invested in the business), I can't imagine you'd still need the same amount in 10 years that you need now unless your savings rate is low.

"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." - This is not really the question that needs answered. How many more years of income do you NEED to continue lifestyle?

This life insurance question seems extremely wrapped up in the business succession plan and I assume a great amount of your wealth is wrapped up in this business and the ease/desire of liquidating that will be a big question. There probably is no "guideline" (10times income) for you, I'd find a professional who can really work through the business succession plan with funding and your income in mind.

[Rick Francis]

I doubt you really need another 20 years of life insurance... with your income you should be saving a lot for retirement. At some point you should be able to self insure. I would start by making an estimate of income needs 5,10,15,20 years out. Then look at current assets and savings rates and figure out when you can self insure and how much you really need for insurance.

You may also want to see about transforming your wife's business so that if she is unavailable the business can still function. If it is still a functional business it could be sold and that should factor into your calculations.

-Rick Francis

[getagrip]

What is missing is what are your annual current and expected future living expenses?

If you are in a situation where if the debt was paid off from the life insurance (e.g. the $550K or so on the properties), your anticipated living expenses based on your currrent expenses minus the debt payments are only $50K a year, then if either of you passed the other would easily be able to maintain the family standard of living and bank the remaining insurance money (i.e. $400K+ for you and $900K+ for your wife).

If your anticipated annual future expenses are $100K after debt payoff, then you're passing has no financial impact on your wife's ability to maintain your family lifestyle while your wife's passing would likely result in your needing another $50K a year where the $900K plus leftover insurance can support that for 18 years, plus 4 years for your investments, which at 22 years of direct support should get you to your mid 70's.

So basically, it seems you're likely doing fine and just putting the policies out there another 20 (or even less if your savings goes up in that time) term is fine.

Now, one thing you might consider, is whole life insurance. While I personally feel that for a lot of people whole life policies don't make sense over term, given your higher income and wealth building potential it may make sense to use some variable of a whole life policy in your case. Something you might want to consider rather than just re-upping the term (though don't let the terms collapse while looking into it :-).

[getagrip]

Sorry, just wanted to add that the amount of your expenses needed to be replaced should be driving your considerations with respect to coverage along with the debt repayment. Hence, if the two scenarios I used as examples were close to your situation, then it seems that basically your doing fine.