My Life Insurance Plan is currently $1,650,000 in term life insurance. That is a big number to a lot of people. Here’s the thing, it does not go as far as you think it might.
Term Insurance
I have three policies they are all term, and the oldest will not last much longer. Term insurance covers the policy holder for a specific length of time. Term insurance is NOT permanent, it will expire, and it does NOT build cash value. It is a LOT less expensive than permanent insurance.
In the case of my oldest policy it is a 30 year term. I got it back in my 20’s and I’m now in my 50’s. When the term ends the policy will revert from a term policy with a monthly premium that stays the same year after year to what is called an “Annual Renewable Term” (ART). Annual Renewable Term (ART) goes up every year and the older you get the more it goes up each year.
So when my policy’s term ends I’ll cancel it. I don’t want an ART policy. Of the three (3) policies I have this is the smallest at $150,000 in coverage. I originally got it to cover a business loan in case something should happen to me.
Kids drive a need for more life insurance coverage
Some years later I got married and we had kids! If you have kids you have a big need for insurance. So I went out and got a 20 year term of $500,000 in coverage. Back then I wasn’t selling life insurance and I don’t know how I came up with that figure, but it seemed like a big dollar amount to me.
Now let’s fast forward a few years into my career in insurance. I still only had those first two policies. I was sitting down helping a lady with her health insurance when I found out her husband had passed just one week before. We started reviewing her finances and I was shocked. If she used the money to pay off the house, cars, and what little debt they had…well there just wasn’t much left to live on. If they continued as they were financially the money would run out in less than five (5) years and she still had two kids at home.
$500,000 in term life insurance might not be enough
How much life insurance did the husband have? $500,000. That figure I didn’t put a lot of thought into. That figure that seemed pretty big. When you start crunching the numbers $500,000 doesn’t go very far (IF you have a house to pay for, kids at home, and car payments).
After that appointment I went out and applied for a $1,000,000 policy. Why a $1,000,000 policy and not another $500,000 policy? Because this time I did some math. Below was my thought process and how I created my own life insurance plan.
First, use $150,000 or so to pay off the house, car, etc. That leaves $1,500,000. Second, put $250,000 back for each child for educational purposes. We have two children so that leaves $1,000,000. Third, invest the last $1,000,000 and don’t draw off more than 3.5% – 5% a year.
If they can survive on 3.5% to 5% a year then the principal (the original $1,000,000) shouldn’t ever be used. This is important to me for 2 key reasons. First, my that $1,000,000 should provide income for my wife all the way through retirement. It doesn’t make her rich, it makes her secure. Second, when my wife passes of old age at 93 that $1,000,000 will still be there to be passed on to my kids. That’s my math for my life insurance plan. It’s simple and sufficient.
Here’s a few other things to think about.
My Life Insurance Plan is about more than just paying off the house
Paying off the debt is easily done if the money is there from life insurance. It lowers the amount of money needed each month to pay bills and it provides peace of mind.
They might not use all the money I am hypothetically putting back for education. Two hundred and fifty thousand dollars sounds like a lot to put back for education and it might be…but it might not. If they go to Pellissippi State and get an associates degree then there will be lots of money left over.
If they go to TN Tech or UT Chattanooga they can still get an affordable four year degree. What if they are really smart and get into medical school or law school? What if they can get into Vanderbilt or Duke? I don’t want my kid’s future limited by whether or not they get a HOPE Scholarship or a grant. If they get a four-year degree and a master’s degree $250,000 each might not be enough, but they won’t graduate with an absolute mountain of debt (hopefully).
If they don’t used it all it then the balance can be combined with the $1,000,000 and maybe my wife can live on more than $35,000 to $50,000 a year.
This is how you create a lifetime income with life insurance
Lets look closer at that $1,000,000. Why on earth would I instruct my wife to live off of such a small percentage? 3.5% to 5% of $1,000,000 is $35,000 to $50,000 a year. The answer is simple, so the money will last. If she invests in the market (stocks, bonds, but mainly mutual funds) some years the nest egg will increase and some years it will decrease.
Just an example of a few years of returns. Let’s say that I croak and my wife gets the checks from the insurance company. So the first year she is just going to be withdrawing from the principle so her initial investment is $955,000. Analyzing possible returns by looking at historical return for the S & P the last 15 years this is what happens to the nest egg…It’s still there, at least most of it ($870,047 after 15 years).
Investment choices and withdrawal will affect how long the principal will last
There is still enough to carry her into her retirement years, have a reasonable retirement, and possibly leave behind some to the kids (and or hopefully grandkids)…but it does shrink.Let’s look at a different scenario. Let’s say that instead of pulling out $45,000 a year she pulls out $90,000 a year. In that case the entire nest egg is gone at year 20.
IF I were to die today (I have plans to actually outlive most everyone, but the best laid plans of mice and men….) that would mean she had nothing left to live on during retirement. What about $65,000? IF I were to pass today that would give her income till she was 73 years old and at that time the nest egg would be gone. Variation of return in the marketplace can wreak havoc with anyone’s nest egg, so you have to live on a fairly small percentage of it if you want it to last.
What do you want your life insurance plan to do?
You need to think about these things when you put together your own life insurance plan. What do you want your life insurance to do for your family if you die?
So that million dollar policy provides my family with an income of $45,000 a year and it has a realistic chance of serving my wife all the way through retirement. $1,650,000 of life insurance is a decent amount. It’s doesn’t make anyone rich. It doesn’t replace me (I’m one of a kind). What it does is to give my family a fighting chance financially. What could your life insurance do for your family?