Yeah, it’s all about the subsidy level which can be all over the map. My employer gives you a choice when you first get hired whether you want 1, 2, 3, or 4x your salary in coverage. I assume a bunch of people just see that 1x is “free” and that the costs go up for 2, 3, and 4x and just stick with 1x, not realizing how good a deal it is for 4x. If everyone selected 4x, maybe they wouldn’t subsidize it so much lol.
So I have no idea how much or how long to insure for. Any suggestions for a 34 year old with a 7 month old? 500k for 20 years? Should each spouse get their own policy? We plan to have one more child. House should be paid off within 15 years. We max out retirement accounts.
Nobody can tell you a number because they don’t know your financials. You need to estimate the survivors’ expenses for as long as you want to provide for them (thru college, high school, etc.). Each spouse should get their own policy if each spouse contributes income or income equivalent that will need to be replaced.
Things may have changed since I needed life insurance, but the following links should give you a good start. I just glanced at them, but am sure someone else may have better resources. One definite thing - make sure you and the wife have proper wills.
https://www.mintwise.com/blog/calculate-life-insurance-coverage/
https://www.bankrate.com/calculators/insurance/life-insurance-calculator.aspx
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As long as you are building up other retirement savings, and you live in a reasonable-cost-of-living area, then I don’t see a problem with a 500k / 20yr policy.
Assuming you have your second child in the next couple of years, that gets both of them mostly to adulthood, and gets to a time that your retirement accounts should be closer to “self insuring” for a decently higher amount of money than the policy anyway.
I would definitely recommend getting a similar policy for the wife, though, because even if she was a stay-at-home mom, you are going to face serious expense in filling the child care role if she dies while they are children.
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Calculators are ok for a ballpark estimate but they won’t be able to take into account your exact situation. Life insurance is an income-stream replacement. The horizon is whenever you no longer need to provide for people currently (or in the future) will need your income.
If you plan to have another child, you could always take out a new policy at that point (unless it’s so soon that you predict it already). But 20 years is ok for the first child since they will be just one year from finishing college so most of their expenses should be covered at that point. But 20 years is gonna be cutting it close if you have your next child in say 3 years.
For the amount, it depends whether spouse works or not and what expenses they’d face without you (and vice versa for you without them for their policy). And also it depends on how much they currently earn and what lifestyle you want to provide for your spouse and kids. Be generous to factor in inflation too. And consider carefully other income sources (group life policy from work if any and widow death benefits from social security).
Another thing you could look into is laddering. Assuming your spouse can support herself, as kids grow and you accumulate wealth, your needs for life insurance typically decrease over time. I mean 15 years down the line, even with inflation eroding your life insurance amount, you’re unlikely to need the same amount as your initial policy to pay for raising your kids the rest of the way. So instead of a $1M policy 20yr policy, you could also do a $500k 10-yr policy + a $250k 15-yr policy + a $250k 20-yr policy. That way you’re not paying down the line for insurance you no longer need. That should lower your total premiums and/or allow you to afford higher coverage initially.
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On the laddering concept, when I last shopped for life insurance, for 20 year term policies, the cost of 250k versus 500k of coverage was nearly identical. And when there was a difference it was nowhere near proportional to the insured amount (dollar-for-dollar the 250k policy was considerably more expensive than the 500k policy).
So I don’t know that it really makes sense to ladder in blocks smaller than $500k.
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I bought a 30 year plan nearly the same age you’re at @matrix5k. My situation was similar to yours–1st child on the way, and a 2nd someday in the future. It seemed easier than buying a 2nd policy to cover baby #2 later. Now 5 years in I’m glad I did go with the 30 years. I will have both kids covered through college, and at like $10 a month more than 20 year coverage would cost. Really inexpensive to be covered for what will realistically be the full years of my working life.
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I have another dumb question. Do most people get life insurance for only their working life, age 65 or so? Is this because if they pass away around this age, the child will be self sustaining by then? Or because they will be a beneficiary of the parent’s retirement accounts?
Unless you know a lot more about when you’re going to die than the insurance company, life insurance is a negative expectation bet. Why would you take that, if not for risk control or some tax planning reason? You shouldn’t get any insurance “just because”, you should consider it only because the alternatives are worse.
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I have no idea, everyone says to get life insurance if you have kids. So you’re saying it’s not worth it? I’m so confused.
What I mean is if your kids no longer need your support, you no longer need life insurance for that. That’s why you should get 20 year term if you want it when they’re little and they’ll be adults after that and you don’t need to overpay for insurance against bad luck with your health at that point.
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A purpose of life insurance is to provide necessary financial support for your loved ones after you’re gone. If you were to die tomorrow, would your wife and kids be able continue to put food on the table and keep a roof over their heads without your income? The answer to that determines whether you need life insurance at all.
As to how much and for how long? An estimate of annual household expenses multiplied by the number of years until she could reasonably start collecting Social Security might give you a ballpark figure and time frame. (Or you could just use your annual gross income, to make it easier.) If she’s able and willing to take steps to generate some income in the event of your premature death, that might lessen the amount of life insurance needed.
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You are trying to make sure your spouse (or if you both die, whatever guardian you name in your will) will be able to take care of the kids until adulthood.
In my opinion, a lot of people overbuy insurance and would leave their family better provided for in the event of their death. As xerty points out, that is a “losing bet” that is a waste of money to take.
That said, if you have a stay-at-home spouse that doesn’t have a meaningful work history or reasonable employment prospects, you probably want more insurance on yourself than if your spouse had a degree and a work history and the ability to have gainful employment.
Also, take a close look at the resources your parents and your spouse’s parents could bring to the table in the event of your death, as that could balance some of the issues of a non-working spouse if family was willing to move in together.
And take a close look at what social security survivor benefits look like.
Your kids will get some kind of stipend, each, until they turn 18.
Then you try to fill in the gap with insurance so that your kids have the necessary finances covered to get them to adulthood.
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You get life insurance only for as long as you have a need for income replacement should you pass away. So when you no longer have people depending on your income to live, then you no longer need life insurance.
For me, since my spouse can support himself with his work, I only need to provide for my kids until they’re out of college. But I also take a look at my other assets and liabilities. If I die when my last kid enters college, his 529 plan and my savings + group life insurance from work (2x annual salary) should be more than enough so I got life insurance expiring two years after he enters college (and I could letting it lapse before that if I realize I don’t need it earlier).
Bottom line, there is no set date. If you have kids very late in life, you may need life insurance for as long as you have earned income. On the flip side, if your kids and spouse are all independent when you’re say 50, then you don’t need the life insurance after that.
Only caveat, is that some people with large estate may want to use life insurance for estate planning as well. But with the current exclusion limits, you either have an estate planner who will advise you on that or you don’t need to worry about it.
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There’s gold in this post. I never read anything about ESA or UTMA until now and didn’t know about the tax-free portion of child’s income.
What’s the optimal strategy? It seems like an ESA is a no-brainer, since it’s self-directed and a parent could make some risky bets (too bad it’s limited to $2k/yr). UTMA/UGMA is great for transferring appreciated assets (or otherwise maximizing the $1k/yr tax-free income). And 529 is for the rest. Do I have this right?
Any recommendations for ESA custodian, maybe with a bonus 
? Looks like Vanguard and Fidelity no longer offer it. Schwab looks good.
Also I think we need a thread on 529 accounts…
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TDA has ESAs too.
Thanks. $6.95 per trade vs Schwab’s $4.95. Not that I plan to trade that much, but still.
I like TDA stock execution better than Schwab by a fair bit, but then again, I have lower commission rates at TDA since I trade a lot there compared to Schwab so it’s an easy call for me.
The other issue is that ability to contribute to ESA phases out at higher incomes ($220k married filing jointly or $110k for others).
Another minor caveat of ESA is beneficiary cannot be over 30 or you have to start paying taxes and penalties. Not a huge deal considering limit to annual contributions and possibility to change beneficiaries, but still.
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Anyone can make the contribution, including the child themselves.
https://fairmark.com/kids-and-college/coverdell-accounts/contributions-to-coverdell-accounts/
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