Reducing the Cost of Life Insurance

Do you need life insurance?
Life insurance is to protect income. You really don’t need it if you have no dependents. You should also be able to drop it after you retire and have pensions and investments set up to pay for your spouse. My wife and I currently only each have a $10,000 group term life policies that we get inexpensively through the school district we retired from. It would help cover funeral expenses. If I were die today, my wife would receive 60% of my pension.  We plan to use returns on our investments as fun money until one of us dies, and then use investment income to make up the gap for losing 40% of a pension and one Social Security check.  A rule of thumb is that you will need 80% of your current income if your spouse dies, since some of your expenses are fixed.  You can examine your own budget to see what expenses would drop and what would stay the same, if your spouse dies.

This is what our situation looks like:

jan feb 2016                      If I die         If my spouse dies
Gross pay      5936.48      4701.33        4797.04
Income Tax     300.27        184.67          199.08

Net Pay          5636.22       4516.66       4597.96

College                    1440    1440            1440
Transportation        700      350              350
Food                           594      297              297
Health Insurance    334      334              334
Medical                     300      200              200
cell phone                 219      169              169
Travel                        200      100              100
Entertainment         200      100              100
Personal                    400      200              200
house repairs           187      187              187
property tax             186      186              186
Charity                      216       108             108
Internet                       50         50                50
Electricity                   81         81                81
child summer food   75         75                75
homeowners ins       74         74                74
gyms                            53         30                30
Natural gas                 33         33                33
Weight Watchers      40         20                20
Xmas                            40         40                40
garbage                       18         18                18
Newspaper                 13         13                13
Netflix                            9           9                  9
Subtotal                     5462   4114           4114
misc and water         174.21 402.66        483.96

We don’t need more life insurance.  At this point in time, the reduction in income from one of us dying is more than made up by a drop in expenses.  That situation will change when we start collecting Social Security, because we will then lose one Social Security check and 40% of a pension when one of us dies.

Social Security Survivor Benefits

Social Security survivor benefits are really life insurance.  The Social Security Administration quit sending out paper statements annually a few years ago, but you can look up your benefits at their website.

Their are several types of survivor benefits.  Your spouse can receive survivor benefits, if you have children under sixteen.  Otherwise, they can’t receive benefits based on your Social Security until they are sixty, or age fifty and disabled.  They can’t receive a survivor’s check and their own Social Security at the same time.

Your children can receive benefits when they are sixteen and seventeen.  They can also receive them at age eighteen, if they are still in high school.  An adult child can receive benefits, if they were disabled before age twenty-two.

Your parent is eligible for Social Security survivor’s benefits, if they are your dependent and they are at least 62.


Pension Survivor Benefits

Before we took retirement benefits, our pension also had a death benefit that would have paid if one of us had died and we still had minor children.  We did get life insurance through that period, but it might have been unnecessary.

Term vs. Whole Life Insurance

In most cases, the answer is term.  I read Andrew Tobias’s book The Only Investment Guide You’ll Ever Need, back in the 1970’s.  He argues that term is much cheaper, and that life insurance is only a temporary need until you have pensions, Social Security retirement benefits, and investments in place.  If you are trying to avoid estate taxes, whole life insurance can be used to pass on wealth.  This isn’t an issue for most people, since the first $5.34 million of an estate is exempt from federal estate taxes.  You can see if your state has an estate tax and what is exempted at this link.

Group vs Individual Life Insurance

Group life insurance policies are much cheaper than individual policies.  This is because group policies spread risk among members, while individual policies don’t.  The advantage of an individual policy is that you don’t lose coverage when you leave a group that made you eligible.  We have had group life insurance through our employer.  At one time, I also had it through NEA and Phi Delta Kappa, an education organization.  AARP has group term life insurance available until you are 74.

How Much Life Insurance Do You Need?

It depends.  It’s probably best to check what your family’s income from Social Security and pensions would be if you were to die.  I’d recommend calculating a budget if you were to die.  A couple expenses to consider covering from life insurance are mortgage and higher education.  If you had enough insurance to pay off your mortgage, would your spouse have enough income to support the kids in their current lifestyle?  You might want to consider enough life insurance to pay off all your debts.

In calculating higher education costs, you could calculate your parent contribution if you were still living and/or calculate the family contribution if you were to die.  The advantage of calculating what it would be if you were still living is that it means your children wouldn’t have additional college loans, due to family income falling.  Once you calculate your parent contribution, multiply it by the number of years you expect your kids to be in undergraduate school or technical school.  The average time to complete a bachelor’s degree is six years.  I told our daughters that we’d pay our parent contribution for four years and no more, and if they didn’t spend it all we’d save the difference for them for graduate school.  Our older daughter finished in three years.  We used the money that she would have used for her fourth year to pay off her undergraduate debt.

If you are calculating enough life insurance to produce income, you could assume an after inflation rate of return of 3%-4%, if it is invested in a diversified portfolio of stocks and bonds.  In making estimates, it’s best to err on the side of caution.  Group term life insurance is relatively cheap, particularly at a young age.

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