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Do I Have Enough Life Insurance?

January 13, 2018 by Lazy Man 5 Comments

Over the last few months, I’ve been writing about life insurance. I covered why life insurance is important, the best times to buy life insurance, and the pros of cons of whole vs. term life insurance (the two major types of insurance).

Today, I’d like to cover the basic question that many people ask themselves, “Do I have enough life insurance?” I’ll do that by using myself an example. Everyone’s life situation will be different and your situation will be very different than mine. However, maybe by reading my thought process, you’ll get some insight into what may work for you. As always, I recommend hiring a professional advisor to help guide you through specific personal questions you may have.

With that out of the way, let’s dig in. Time to play, “Do I Have Enough Life Insurance?”

How Much Life Insurance Do I Have?

You answer any “enough” question you need to two components: 1) the amount you have and 2) the amount you need. Calculating what you have is always easy. If you have life insurance, you probably have the paperwork around somewhere.

Because I’m married, I’m going to answer this question jointly with my wife. I personally have $500K of term (20 years) life insurance. It was bought before my oldest son was born. The idea behind it was that if I died, it would comfortably cover child care expenses until he was in college. When we had a second boy nearly a year later, we didn’t make any changes. Raising two children with $500K is not quite as comfortable as raising one, but it’s still a healthy number, right?

My wife has $400K of life insurance through her employer, the United States Health and Human Services. Unlike when we bought insurance for me, we didn’t add more life insurance on her. Why? We were told that adding life insurance on a pregnant woman wasn’t particularly feasible due to possible complications of the pregnancy itself. I don’t know if this is really true, but with $400K under our belt and enough other things to think about (“OMG we’re going to be parents!”) we let that slide.

How Much Life Insurance We Need?

In the previous articles that I mentioned above, the point of life insurance is generally about insuring against financial obligations if you die.

Above, I mentioned two financial obligations, our two sons. (I’m sure they love being referred to as that when reading Dad’s blog years from now.) At ages 4 and 5, we still have a long way to go until they are on their own, but it’s already flying by too fast. On the other hand, we got through the first quarter of raising them. When they go to Kindergarten, child care gets a lot cheaper. With either of our deaths the $400K or $500K goes a lot further now. The $400K, left uninvested, would be $28,500 for the next 14 years, which feels fairly comfortable given our frugal lifestyle.

The other financial obligation we have is our home. We need to pay our mortgage. However, I considering that a “necessary expense” just like, “We need to buy food.” We have a very low interest rate, 2.75% on a 15-year mortgage with about 9 years remaining on it. We are currently paying around $32,000 a year on it. The $400K or $500K could be used to essentially eliminate one of the biggest expenses – a place to live. There’s tremendous overlap between the costs of raising two boys and the biggest expense of a place to live for all of us.

In either case, I can see $400K or $500K being enough to “get to the finish line” with the mortgage and the kids to age 18.

Now this presumes that there would be no other income coming in. I’m not sure that’s realistic. Let’s take the two scenarios:

If I died, my wife would be able to continue to work her 6-figure pharmacist position. In a year, she’s eligible to retire from active duty with 20 years of service as a commander officer, which makes her eligible for a pension. I estimate that to be worth around $50,000 a year. She could retire and work part-time at a local pharmacy for some extra money if necessary. With my $500K of life insurance, she could continue to earn six figures without working much at all until the kids are ready to take care of themselves.

If my wife died, things would be tougher. I don’t know whether there is a pension for suriving spouses who haven’t reached 20 years of service. For that reason, I’ll consider the pension a $0, but when she does become pension eligible, we’ll have an option to insure that pension. This is almost a type of life insurance in and of itself. In the zero-pension scenario, I’d use the $400K as a bridge to get to the finish line (kids become 18 year-olds). I’m fairly frugal which allows me to stretch a dollar further than most people. While blogging and dog sitting aren’t very steady forms of income, I feel fairly confident I can bring in a combined $25,000 a year with them in bad years. I’d actively look for a more traditional job using my computer science degree that would pay a lot better. Right now, I value the flexibility of blogging and dog sitting to support my wife’s career.

This article is already long enough, but I’m leaving out two more pieces of the puzzle. We have some cashflow-neutral investment properties that I estimate will pay around $40,000 a year in 10 years when the mortgages are paid. So that’s another positive. On the negative side, I presumed the kids will not need financial support after 18, which isn’t likely. I think these cancel each other out or lead to a net positive in cash flow down the line.

Final Thoughts

Based on this, I’m thinking that it would be best to supplement my wife’s life insurance by perhaps buying an additional $500K policy on her. The wild card is the pension, which can make a world of difference. Once I understand the rules around her pension in more detail, I will be better able to decide how much life insurance I would need for income replacement.

The above article is brought to you by Midland National. You can read the latest Midland National News here. These are my own words and thoughts.

Filed Under: Insurance Tagged With: life insurance

The Best Times to Buy Life Insurance

December 11, 2017 by Lazy Man 3 Comments

In personal finance we often say the best time to buy into the stock market was years ago… the second best time is now. For many people, buying life insurance is the same way. I should stress the “many” there, because not everyone necessarily needs life insurance. Let’s put aside “now” for now and get to some of the other best times to buy life insurance.

I think there are four major times in your life to consider buying life insurance. In my opinion one of them outweighs all the others. I’ll lead of with it because it’s when I bought life insurance:

1. When You Become a Parent

Creating and/or caring for very little human lives is kind of a big deal. After all, a career in baby modeling is kind of a long shot. They need someone to take care of them. Ordinarily, it’s a difficult job to do. It’s much more difficult if you are not living. Maybe a spouse or partner can do it, but they may need to work. That’s when it comes in handy to have a bunch of money around. Suddenly day care and babysitters are one less thing to think about.

2. When you Buy a House

As one real estate agent said to me, “A mortgage is an obligation.” I think he went on to say that if I died my estate would have sell the condo to pay back the bank. At the time, I was fine with that because I wouldn’t need the condo any more since I wasn’t living in it. However, what I didn’t know at the time was that the housing market was going to collapse. My property lost more 40% of it’s value. If I had died around that time, my estate would have to come up with the $80,000 difference.

Fortunately, I had decent assets in my retirement accounts at the time, so I decided against buying life insurance.

Double fortunately, I didn’t die and the housing market mostly recovered.

3. When you Start on Your Own

When you leave your parents’ nest and have to live on your own, it’s worth looking into buying a small amount of life insurance… enough to cover funeral services. The idea is not to be a financial burden on your loved ones. This came up in the comments of my previous article, and I dismissed it. My thinking was that you can always plan for a frugal funeral if that’s your concern. If you do that and keep an emergency fund of a thousand or two you should be fine. In fact, perhaps you have possessions like a used car that could be used to pay for funeral services.

I had some people say that I shouldn’t dismiss the costs so quickly. Out of respect for their opinions, I include this on the list.

4. When You Become a Parent (Part 2)

You’re not imagining things, this is a re-run of #1 above. However, in #1, I was talking about buying life insurance for yourself. Instead, I’d like to talk about buying life insurance for your child. It may sound silly buying insurance for a baby. I thought it was silly the first time I read about it here. However, take a minute and think about it. I know it’s difficult, because it’s essentially the worst thought to have in head. However, not thinking about it doesn’t make it go away.

What if you did lose your child? Would you be able to work? I can’t imagine that I’d be able to focus very well. If you have an understanding employer perhaps you can get some time to grieve. Money isn’t going to heal those wounds. However, it can buy some time to try to put your life back in order as best you can.

Can you think of other times that are great for buying life insurance? Let me know in the comments.

The above article is sponsored by Midland National. If you are in the market for life insurance they have a great BBB rating. Even though this is a sponsored article, these are my own words and thoughts.

Filed Under: Insurance Tagged With: life insurance

Pros and Cons of Whole and Term Life Insurance

November 30, 2017 by Lazy Man 3 Comments

Did you know that September is Life Insurance Awareness Month? It is according to the National Association of Insurance and Financial Advisors (NAIFA).

You are probably thinking, “That’s great, but ummm, isn’t this the last day of November?!?!” That’s a great question. I wrote this article back in September, but a series of unfortunate events brings me to publishing it today.

It’s one thing to procrastinate in publishing a life insurance article. It’s quite another when it comes to buying life insurance.

Let’s get back to NAIFA. They have a scary message for America:

1 in 3 households would have immediate trouble paying living expenses if the primary wage earner died, according to the 2016 Insurance Barometer Study by Life Happens and LIMRA. And the study also found that 40% haven’t bought life insurance or more of it because they’re unsure of how much or what type to buy.”

I take away two main thoughts from that:

  • As they used to say at my college, “Look to the left of you and look to the right of you. One of you isn’t to graduate in this major.” With life insurance, it’s look to the left and look to the right. One of you isn’t prepared if an unexpected death were to happen.

  • We need to talk more about what types of life insurance is available. Personal finance bloggers (starting with me!) need to do a better job.

I’m going to set aside the question of how much life insurance to buy for another article in the next couple of days or weeks. For now, let’s cover the two main types of life insurance to buy.

What are Term and Permanent Life Insurance?

Term life insurance is what you might expect… insurance for a term (number of years) of your life. Your coverage lasts for your policy’s particular term, like 10, 20, or even 30 years. At the end of the term, the level premium expires.

Permanent life insurance is also what you might expect… a permanent insurance policy designed to last your entire lifetime. As long as you keep paying the required premium, your beneficiary will receive the death benefit payout when you die.

Pros and Cons of Term and Permanent Life Insurance

The main pro for permanent life insurance is that as long as your policy is in good standing, your beneficiary will get the payout of the money no matter when you pass away. The con is that you may have to pay the premiums for your entire life. Let’s say you buy it at age 30. The price might seem inexpensive cheap, but if you are lucky you’ll be paying for it for more than 50 years. That’s a long time to be paying money, month after month.

The main pro for term insurance is that it is less expensive. You and the life insurance company have a shared interest in you living past that term. You want to life past the term, because living is kind of the main goal in life. The insurance company wants you to live past the term, because then they don’t have to pay out the death benefit to your beneficiary. That’s the main con, you might spend money on your premiums, and if you live past your term, your beneficiaries don’t get a death benefit if the policy is not renewed.

At first glance term life insurance might not sound attractive. In the best case scenario, you are paying an ongoing premium to the insurance company. However, we are talking about insurance and a basic principle of that is paying money in hopes that something doesn’t happen. You might have fire insurance on your house. You aren’t looking for a fire to happen. You simply want to know that if it does happen, the money you receive will get you through the disaster. And if you’re lucky, and your house never burns down, you don’t get the money you spent on fire insurance back. You just chalk it up to the price of financial protection.

So how should you use term life insurance? Here’s an example from my own life. When my wife was pregnant with our first son, I bought a 20-year term life insurance policy. I’m not looking to die in the next 20 years, but if the Land Shark appears at my door tomorrow, my wife will receive enough money to ease the burden of raising the kids. That’s true even though I’m a stay-at-home dad. I still greatly prefer Plan A: living, but I can sleep well at night knowing that either way the kids will be cared for. We have similar term insurance for my wife… I’ve read that the Land Shark prefers females.

By going with term insurance, we were able to pay a lower, affordable premium. You might ask what happens after 20 years. The hope is that the kids can fend for themselves by that time. If not, we still have numerous other investments in retirement accounts and real estate. With 20 years of investment growth, the surviving spouse could use some of that money to give a little helping hand without the insurance money.

As usual, you need to consider what’s best for you. I think it’s always smart to consult your financial professional when making financial decisions like these. That qualified person will be able to explain the pros and cons of various life insurances better than I can in this space.

The above article is sponsored by Midland National. However, these are my own words and thoughts.

Filed Under: Insurance Tagged With: life insurance, term life insurance, whole life insurance

The Importance of Life Insurance

September 11, 2017 by Lazy Man 7 Comments

I think I was around 13 or 14 the first time someone asked me about life insurance. My mother described a policy where I could pay some ridiculously low amount, I think around $6 a month for whatever the coverage was. The big question she had for me was whether I’d continue to pay it for the rest of my life to keep it active.

"Do you have a moment to talk about life insurance?"

I like to think I was a responsible early teen, but I didn’t think it was wise to make such a commitment. I only had a very, very high-level understanding of what life insurance was. Looking back at it now, I’m happy I didn’t make a decision to buy back then. Even if I would have ended up saving money over the long haul (and I’m not sure I would), I am more confident in my ability to make financial decisions now than I was as a 14-year-old with limited life experience.

The next time I thought about life insurance was after I closed on my first condo when I was 28. At around the same time one of my good friends became an insurance salesman. He put together an in-depth analysis for me to review. The analysis made the point that if I were to die my estate would still be on the hook to make payments on the condo. However, since I was living there by myself with no dependents, I didn’t really care what happened to the condo.

Finally, at the age of 36, I found myself buying life insurance. What changed? My wife and I were expecting our first child. We both earn an income, but if one of us were to die life would be very, very difficult. In fact, raising a child by yourself and working seems impossible to me. I don’t know how some people pull it off. In an upcoming article, I’ll dig into what kind and how much life insurance we bought and why.

The financial support that life insurance would provide can make a world of difference. Money can be used to buy time, buy day care, camps/after school programs. It simply changes everything.

What’s disappointing to me is that I’ve read that too few people have life insurance. It makes sense to me as it isn’t the kind of thing they teach in school.

If you are looking for a place to get started with life insurance, you might want to consider Midland National’s awards or contact them through their LinkedIn account.

While the above article is sponsored by Midland National, these are my own words and thoughts.

Filed Under: Insurance Tagged With: life insurance

Baseball Contracts and Financial Security Revisited

March 3, 2017 by Kosmo 1 Comment

Retro Baseball Pitcher

[Today we’ll cruise into the weekend with a lighter article from staff writer, Kosmo. It’s spring training and a good time to turn your attention to baseball. That is unless you are a Red Sox fan like myself. Then the news about David Price seeing Dr. Andrews is a little like waking up in a Saw movie… though I haven’t seen any of those movies.]

In the past, I’ve written about a couple of baseball players who chose to hedge their bets financially – getting some immediate financial security in exchange for a lower ceiling on their earnings.  Today, I revisit two of those players, Jon Singleton and Andrew Heaney, to see how things have turned out.

Jon Singleton

In June of 2014, I wrote an article about a new contract signed by Jon Singleton of the Astros.  Singleton signed a deal that would guarantee $10 million over the next five season and had the potential to make as much as $32 million over eight years.

Pitcher Bud Norris, never one to show restraint, blasted the move:

“Sorry but this Singleton deal is terrible.  Wish the [sic] Jon listened to the union and not his agent.”

The issue was that Singleton was giving up some upside in the deal.  I estimated that he had the potential to earn as much as $65 million over eight years.  I was personally in favor of the deal.  Why?  Because $10 million dollars, invested reasonably intelligently, should provide comfortable lifetime income.

Why was I worried about Singleton avoiding a worst-case scenario, rather than being concerned that he might be leaving $30 million dollars on the table?  Mostly, because the worst case scenario sucks.  If he washed out of baseball without the guaranteed money, it could mean forty years of manning the checkout counter of the local Qwik-e-Mart.

Top prospects fail in the Major Leagues with startling regularity, and Singleton wasn’t even an elite prospect.  He was a good prospect, but definitely not considered a slam-dunk to succeed.

So, what happened?

Singleton flopped.  In 2014, he played 95 games in the majors, and was horrible, hitting .168.  In 2015, he played 19 games for Houston and hit .191. (If you don’t follow baseball, this is a very poor batting average).  Singleton spent all of 2016 in the minors – and hit .202 in the minors.  On November 20, 2016, the Astros removed him from their 40 man roster.  Any of the remaining teams could have claimed Singleton on waivers at that point, but none did.  None of the teams felt that Singleton’s upside was worth the remaining cost of his contract.

How much would Singleton have made if he had turned down the contract?  He would have made roughly $700,000 in 2014-2016 and would be lucky to earn another $500,000 in 2017 and 2018 combined.  That’s a far cry from the $10 million he’ll actually make.  The clear financial winner so far is Singleton, and there’s really no scenario where the Astros win the deal.  It probably won’t even make sense for them to exercise the “cheap” options on Singleton for the 2019-2021 seasons, because he simply won’t be worth the cost.

Andrew Heaney

About a year ago, I wrote an article about Angels pitcher Andrew Heaney.  Heaney had made news by agreeing to sell a 10% share of his future earnings to Fantex for $3.34 million.

At the time, Heaney was a decent, but not great, pitcher.  I also noted the following risk:

There’s also the risk of injury.  A third of major league pitchers have Tommy John surgery, which replaces the ulnar collateral ligament in the elbow.  It’s a tremendously successful surgery that has extended the careers of a great many pitchers.  Tremendously successful – some studies claims a 90% success rate – still means that sometimes it doesn’t work.  10% of the time, the pitcher never bounces back to pre-surgery form.

What happened?  Heaney pitched six innings in 2016 and begin experiencing elbow discomfort. The Angels tried stem cell therapy as an alternative to surgery.  However, this did not prove successful, and Heaney underwent Tommy John surgery in June.  With a 12-18 month recovery time, he might be ready to return by the end of 2017 – but it’s just as likely he won’t pitch again until 2018.

Heaney will still accrue major league service time for the 2016 and 2017 seasons.  However, when he hits arbitration after the 2017 season, he’s not likely to get much of a raise.

In my earlier article, I suggested that Heaney might have career earnings of between $50 and $150 million.  The upside is probably a bit generous at this point, but it’s still quite possible that he exceeds the $50 million.  Selling 10% of future earnings of $50 million for $3.34 million is pretty much a push, given the time/value of money.  If he hits $100 million in earnings, the Fantex deal will end up costing him money.

But there’s still a big caveat.  Not every pitcher bounces back from Tommy John surgery.  There’s a small, but very real chance Heaney never pitches again.  If that happens, the Fantex investors will get almost nothing for their $3.34 million investment.

While both of these hedging decisions appear to have been smart ones, this isn’t always the case.  Many young players sign extensions that cap their earnings, and many would have been better off not signing the extensions.  However, the stories of Singleton and Heaney highlight the negative situations that those playing are trying to hedge against.  While it’s true you want to bet on yourself, it never hurts to hedge.

Editor’s Final thoughts

I think Kosmo hit it out of the ballpark here with the worst-case scenario. In my view, if you can lock yourself into being well into a “1 percenter” for life, it’s a very good deal… even if you have to give up being a “0.1 percenter.” This is especially true if the downside means going back to being a 50 percenter or worse.

This doesn’t just happen in baseball. Years ago Mark Cuban protected his Broadcom sale to Yahoo with a stock market hedge. It worked out beautifully for him.

Filed Under: Insurance Tagged With: baseball

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