I have been thinking about this lately as I recently turned 40, kids are getting older, assets continue to grow and we are putting a decent dent towards our debt balance.
We each have a 2 year old $1m 20 year term policy, plus 1x year salary from my employer, an automatic benefit. I am pretty confident that if we both died today, our life insurance coverage, $64.5k combined balance in 529s, $615k+ in liquid assets and our home value ($290kish), minus our total debt ($105.5k) would cover our passing, taxes, home, kids, dog and caregiver expenses until they became independent adults.
I love that we sleep well at night with such coverage. That said, at $1,236.6 per year for both of us, these cost a decent chunk of money especially over 20 years! How long do I need these for?!
I am pretty sure we don’t yet have enough money to go without insurance but, it is a good time to start putting a more robust plan of action to determine when that magic day may be.
Next year, we will begin a yearly assessment to decide if we keep or cut. Here is a list of the guiding (but open to adaptation as needed) criteria I have compiled so far:
What do we want life insurance for?
- Cover gap for pre and post retirement expenses for a surviving spouse.
- Cover gap for loss of income towards our dog (assuming 15 year lifespan) and children’s expenses, before they become independent if one spouse dies.
- Cover for dog, child expenses, and their caregiver until kids are independent (here we will assume age 26) in the event that we are both gone.
One parent dies scenario
We anticipate both lower expenses and adjusted retirement goals. While there is the money addition from one policy, we also need to consider taxes and the loss of one income over time (or potentially two at least temporarily, depending on the emotional state of the surviving spouse – even writing this is making me want to cry!).
We would cancel the second insurance if assets could cover in full:
- Passing costs for surviving spouse (should be low since we want to be put in a recycled bottle that turns into a plant, but I digress… that is an entirely new post…).
- Dog costs assuming 15 year total lifespan, but not replacement costs.
- Legal fees for custody or estate transfer for kids and caregiver, should second spouse die.
- Taxes from inheritance for kids and new care provider.
- Mortgage balance, property taxes and home insurance until youngest child turns 21 (adjust age as they grow and we get a better feel for where they are going).
- Balance for any other outstanding debt.
- College savings funded to 100% of 4 year public American university (room, books, board, etc) for each child or whatever is left of their college attendance if in progress.
- Assets to provide for basic living expenses for kids and provider until they each reach age 21, adjusted for inflation.
- Assets to provide for travel, entertainment and extracurricular activities until each reaches 21, to a similar level that they enjoy today, adjusted for inflation.
- Fun asset money for kids as a good bye gift when they each turn 16 (enough for a beat up car each with insurance for a few years or something similar of their choosing).
- Non-employee sponsored health insurance costs for kids through age 26, should that be needed if second spouse dies or is no longer working.
- Adjusted FIRE goals for surviving spouse (70% of couple FIRE goals).
- Long term care and health insurance for surviving spouse.
Parents are both alive, but with substantial savings
We will consider cutting our insurance if our assets cover the expenses from above scenario, with the following adjustments:
- Passing costs for both parents vs one
- Adjusted figures for two people for taxes on more accounts, FIRE, health and long term care for both spouses.
- Adjust for age of kids and future needs.
This year, we will begin putting actual numbers on the above line items for scenario planning so that starting in 2019 we can figure out how far off we are from ditching our insurance. Should keep me geekily entertained for a while!
I hope that as the very worse case scenario, we have to keep the insurance through the end of the 20 year term (18 to go) vs having to get even more life insurance for longer at a higher cost!
How about you, how do you assess insurance needs and when to quit it?