Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

Planning for Your Survivors: How Much Insurance?

   Over at My Journey to Millions, Evan has posted a very interesting article on the question of how much life insurance (and other preparations) you should have in place to provide for your family should you shuffle off this mortal coil in an untimely fashion. He details the amount of insurance coverage he now has — which is substantial — and then remarks that his wife thinks he’s overinsured.

He has things set up so that if she paid off the $355,000 mortgage (my estimate) and invested the rest of the life insurance proceeds, she would end up with a net monthly income of about $5,800. And he worries that it may not be enough.

Probably she can scrape by on $5,800 without having to run out and get a job.

However, it strikes me that he could be right to worry…or not. How much you need to provide for the event of an early demise depends on a number of circumstances, among them the time of your life, the time of your children’s lives, the part of the country where you live, the style in which your family is accustomed to living, and — most obviously — the number of kids or other dependents you’re supporting.

BungalowStyle07262007Evan is evidently a fairly high earner. They’re living in an expensive house — the mortgage represents only a fraction of its value — and that translates to high taxes, high insurance, and probably a pretty high cost of maintenance. Few women can earn that kind of money on their own, and so if anything happened to him, his wife might have a hard time finding enough to cover their present costs, even without his car to pay for, his medical insurance, and the cost of feeding him.

However, in his absence, her overall costs might drop. For example, she would presumably get rid of at least one car, thereby freeing herself of the payments, maintenance, insurance, and taxes on a late-model vehicle. The family might go out to eat less. Whatever costs are entailed in his hobbies and interests would go away, as would the cost of purchasing clothes and other necessities for a grown man.

These savings, though, might be absorbed by the increased cost of health insurance: covering herself and children on the open market would be staggering, and the Affordable Care Act seems not to be about to remedy that problem. Even though generous subsidies will be available for the middle class, a $5,800 net monthly income with a paid-off house does not fall under the heading of “middle class.”

On the other hand, it’s no foregone conclusion that she would stay home and take care of the kids, at least not indefinitely. Bright, high-earning men tend to marry bright, well educated women. In the vacuum that his absence would create, she would soon find herself bored and restless. She probably would get a job or start a small enterprise — certainly as soon as the kids are in school all day, she would. Even a part-time job would supplement the 4% drawdown enough to allow the family to live in comfort. They live in Long Island, where costs and salaries are high, so let’s figure she gets paid about $25,000 for a part-time, no-benefits gig. She’d probably net around twenty grand, bringing her net income to about $7,470 a month. If she couldn’t live on that, then she might need to downsize. But my guess is she could live like the Queen of Sheba on it.

So it looks like Evan is neither under- nor very much overinsured. As he remarks, he doesn’t want his wife to be forced to go back to work out of need. And that doesn’t appear to be likely; if and when she returned to work, she probably would do so because she wanted to, not because she would feel she has to.

§

In considering how much life insurance to buy — and what other provisions you make, such as college savings programs and the like — it’s a smart idea to visualize how your survivors will live in your absence, both in the short term and over time.

My former husband was (and is) a corporate lawyer. Like Evan, he earned a good living and we had a commensurately expensive house. I was a magazine writer and editor; the most I ever earned while I was married to X-DH was about $30,000. Saving was not his forte — the only reason he had a retirement fund at all was that the firm had to provide a plan for everyone if they were to provide it for those who wanted it — and we were in debt up to our noses. There was no way I could pay the mortgage on our house on my own, to say nothing of keeping our son in private school, maintaining a car, and paying the cost of air-conditioning 3300 square feet.

So, he had enough insurance to pay off the mortgage on the house, plus a couple of whole life policies that would have paid a hefty amount in 1970 or so, when we bought them, but not so much in today’s economy. The amount residing in his retirement fund had he passed away at the time I left might have covered most of my expenses, had my son and I lived frugally…but I might not have had access to it for another four years (i.e., if for whatever bureaucratic reason I’d had to wait until I was 59½). In any event, taxes would have reduced my net inheritance of that money by as much as 30 percent.

This would mean that, assuming he figured we were going to stay married (which he probably did), he should have been carrying significantly  more life insurance than we had. I would have needed enough to pay off the house and enough to put our son through an expensive day school and private college and enough for me and the kid to live on.

Graduation ceremony at OxfordToday, K-8 tuition at the school my son attended is $16,475 a year. The cost of operating that big house and paying tax and insurance on it is probably around $2,000 a month in today’s dollars. My present monthly cost of living, exclusive of house costs and absent a young son, is $1100. Let’s add another 50% to that to cover the cost of feeding the kid: $1,650 a month. Back when I paid for cars on time, my Toyota cost $300 a month (it probably would be more now, but let’s accept that figure). So, in today’s dollars I would need about $63,875 a year to maintain our normal month-to-month lifestyle. To net $63,875 a year (assuming a 15% tax rate, which is optimistic) by taking a 4% drawdown on investments, I would need $1,836,406 in savings.

We owed about $70,000 on the house. The cost of our son’s college tuition was about $130,000; let’s add another $8,000 a year to support him in his apartment and cover his incidental expenses. So, in addition to the ordinary living costs, I would have needed another $232,000 to pay off the mortgage and put our kid through a good college out of state (there are no top-flight colleges or universities in Arizona).

$1,836,400 + 232,000 = $2,068,400

That’s less than the amount of insurance Evan is carrying. We owed less on the manse than he does today, but the larger amount he’s providing should pay off their mortgage. So if he projected a lifestyle as grandiose as the one my X-DH had in mind (from day to day we lived no better than I do right now on $2, 355 a month, but the private schools, the expensive vacation travels, and the debt cost a lot), then Evan’s $2,150,000 death benefit should keep them in their home without her having to return to work anytime soon.

Evan lives in a more civilized part of the country, and New York has some very good public universities. It’s even possible that the public K-12 schools are adequate where he’s living. So, if he and the Wife plan to send the kids to public schools, then should anything happen to him, she’ll no doubt be in pretty good shape.

§

Life changes. The kids grow up. They do things you don’t expect, which is as it should be. Consider the situation now for me, a single woman with an adult son:

My son now makes his own way, which in Arizona, a right-to-work state with low wages for all but the 1 percenters, is a pretty meager way.

To get him out of the dangerous firetrap where he was living and put a decent roof over his head, I went in with him to copurchase a modest home in a modest central-city neighborhood. We owe about $201,000 on that. Exclusive of the cost of the roof, he earns a decent living: slightly above the median family income in Arizona — and he’s single and frugal. He covers all the cost of maintenance for the house and has accrued a large emergency fund to cover major repairs. So, I imagine that if the house were paid off, he really wouldn’t need all that much to continue to support him in the life to which he has become accustomed.

 However, what worries me is his future. If the dire predictions about Social Security are correct, he may not have much to support him in his dotage. As we have already seen, the idea that the average American can accrue enough in 401(k)’s and other savings instruments is a massive FAIL. Thus even though he does have a retirement fund, it would be enormously foolish to assume that it will carry him through old age.

Or even allow him to retire at all…  And my son enjoys his job about as much as I enjoyed working for the Great Desert University, which is to say “not much.” Ideally, if he is to take pleasure in any part of the life that remains to him, he needs to be able to retire no later than about age 65, and preferably sooner.

Thus…ah, yes, thus: I would like to leave him enough cash that, added to his own savings and invested wisely, over time it would accrue enough to allow him to retire in comfort sometime between his mid-50s and his mid-60s. Alternatively, I would like him to have enough to quit his job and go into a graduate program that would secure him a less unpleasant and much better-paying job. An actual career, one might say.

I can’t afford big insurance premiums, nor do I think much life insurance is necessary to accomplish what I’d like to do for my son.

My house is paid off. It’s worth about $60,000 more than the house M’hijito is living in. Obviously, I will leave the house to him. This will give him four options:

a) Rent my house, generating enough to pay the mortgage on the house he’s living in.
b) Sell my house and pay off the mortgage on his house.
c) Sell his house, break even on the sale, and move into my house.
d) Sell my house, invest the money, pay the mortgage on his place as best he can from his salary, and let the sale proceeds accrue in brokerage and Roth IRA accounts until he reaches retirement age.

The first two choices would not require him to move. If he used rental income from my house to accelerate payment of the mortgage on his house, then after he owns his place free and clear, rent from my house would be money in his pocket. In that event, by the time he reaches retirement age, he would have the inflation-adjusted equivalent of about $1500 a month to supplement whatever other sources of income he might have.

The third option could be depressing…in addition to hassle of having to uproot oneself, it would creep me out to move into my parent’s home. But people have done it. And my house is bigger, fancier, and in a nicer neighborhood than his, so the advantages would considerable. Whether he sold my house or his, he could get out from under the monthly cost of keeping a roof over his head.

The fourth option would do nothing to improve his life in the short term, but it would add about $240,000 to his life savings.

The whole life policy X-DH and I bought all those many years ago has a $40,000 death benefit, despite my having ceased to make premium payments. After cremating me, M’hijito would have enough left from that to buy a much-needed new car.

The remainder of my assets reside in investments. Unfortunately, most of this is in a large traditional IRA, and so taxes will gobble up a fair amount of his cash inheritance. I figure he’ll net about $300,000, all told, from the investments he gets from me. I could arrange things so he would get about twice that much by purchasing $300,000 in life insurance, but at my age, life insurance isn’t cheap. Just $50,000 worth would cost over $300 a month, and I don’t have a spare $300 laying around. Besides, to make up the tax gouge, I’d have to buy six times that much coverage!

Assuming he manages to save about $200,000 on his own and he does not sell my house and roll the proceeds into investments, with his net inheritance he’ll have about $500,000 or $600,000 (or its inflation-adjusted equivalent) by the time he retires. That’s not enough, of course. To fund a modestly comfortable retirement, he’ll need well over a million dollars — in today’s dollars, assuming no Social Security benefit. If he does invest proceeds from the sale of my house, by the time he retires, he might have enough to provide a livable drawdown.

If his father leaves him a like amount (no guarantee there! he has a wife and her dependent adult child, who has a minor child also needing support), then he would have about enough to retire on, assuming he always lives under a paid-off roof.

That also assumes he never marries.

However, many men his age do find wives, and with any luck at all, the Mother of My Grandchildren is searching for him right now. If she ever finds him and he notices, the situation changes: first, she adds to his wealth by working, but second, they add to their expenses by having children. In that case, a few hundred thou from me should help them a little, though it won’t ensure either a comfortable retirement or, given the way our country is going, any retirement at all.

You can’t really second-guess the future. Whatever my son gets from me and his father, he’ll need to handle it intelligently for it to benefit him…and yet not be so pinch-penny that he never gets to enjoy any of it.

Update: This post was selected for the August 19 Carnival of Personal Finance at Barbara Friedburg Personal Finance.

Author: funny

This post may be a paid guest contribution.

12 Comments

  1. I didn’t want to comment on this but I just had to.

    1. When your kids get out of high school, give them a suit case for their 18th birthday and tell them to join the NAVY. Obama wants our whelps to stick around until they are 26.
    Hey it’s a big wonderful world out there, go explore it.

    2. Put all your assets in a living trust. There is a lot you can do with that instrument.

    Explore that also.

    • Don’t know that I’d wish enlistment in a war that’s gone on for 10 years with no end in sight on anyone, even a wastrel son.

      My father built a good life after having run away at 17 and lied about his age to get into the Navy. By the time WWII broke out, he’d put in a hitch in the Navy, one with the Coast Guard (a Navy doc imagined he’d heard a “heart murmur” and wouldn’t let him re-enlist), and started his career as a Merchant Marine deck officer. Eventually he had a license to sail any tonnage on any ocean, the sailor’s equivalent of a Ph.D.

      To what extent that kind of opportunity holds true today, I don’t know. One of SDXB’s daughters (the responsible one) married a career Air Force officer, trained as a helicopter pilot. Nearing retirement, he’s now in Afghanistan… If he survives intact, they’ll be pretty well set. If not…well… ???

  2. What an interesting article! I wish I had a dollar for every time I witnessed the hard earned savings of an acquaintance getting passed on to their heirs…..only to be “piddled away” in the blink of an eye with the purchase of cars…vacations…and poor investment decisions. A lot to be said for …”teaching a man to fish…” etc. I would consult with a planner to gain some control over your assets …even after your death. The trust may be the way to go. BUT as in so many things in life………”your mileage may vary…”

    • Luckily, my son is very responsible with money. In his case, the only point of a trust would be to get him to SPEND the stuff! Buy him a vacation, some decent furniture, a few new clothes…

      Not so for some folks, that’s for sure! SDXB has a daughter who just cannot comprehend money. His solution, finally arrived at late in life, is to spend the money on himself while he still can. 😀

  3. My brother didn’t get married till he was almost 40. So you may get your grandchildren after all!

  4. Pingback: CARNIVAL OF PERSONAL FINANCE; BACK TO SCHOOL EDITION | Barbara Friedberg Personal Finance

  5. I understand Evan’s concerns. I don’t share them in my relationship, though. Both J and I are equal earners (though I make a little more than him because of my side income) and if I passed, he would get $250K. This is more than enough. That would bring the mortgage down substantially (to almost nothing) and he works so he’d still bring in enough to support himself with extra. Plus we have a suite that my brother lives in which brings in even more.

    • But would it bring the monthly mortgage payments down? The way all the mortgages I’ve had work — including variable rate instruments — you keep paying the same flat rate until the entire principal & interest are paid.

      What if the two of you were together in a car wreck? One is killed and the other too badly injured to work…in the scenario you describe, he could burn through $250,000 fairly fast with medical bills, convalescent costs, rehab costs, and the base cost of living.

      Heh…it’s a grey, overcast day out there this morning…looks like it’s cast a grey mood on the Old Bat, too! :mrgreen:

  6. For me it is the opportunity cost to have that much insurance. If I were 40, 50 or 60 I think it would be a VERY different conversation, however, insurance at 30 (with my rating) just isn’t that expensive.

    For example, a $1,000,000 20 year term costs less than my cell phone bill. So for that kind of cost why not over-insure to make sure that The Wife and boy don’t want for a whole lot when if I am not around.

    • That is a very important issue. I should have mentioned it in the post above: for obvious reasons, the older you get, the more life insurance costs. For me to buy term life insurance at my advanced age to tide my son over any difficulties that might occur after I kick off — well, the cost is just prohibitive.

      Term life insurance has a term: after x number of years, it expires and you have to buy a new policy, at a much higher cost, because you’re now that much closer to the end of your life. The cost of whole life insurance stays the same, and, although these plans have some serious drawbacks, over time the out-of-pocket costs may be less. Examine these things carefully before buying.

      At 50 or 60, Evan’s conversation with the Wife will be much different, too, because assuming he stays on track, they’ll be a great deal more affluent. The house probably will be paid off, the kids will be grown or nearly so, and the couple presumably will have stashed a hefty amount in savings. Under those circumstances, he may not need any insurance at all.

  7. What the Mrs. and I have done is created a living trust and then a dual life insurance policy. The survivor of the first one that kacks gets the $50K and then the survivor can do what he/she wants to do with the money.
    At our ages, no sense in having two life insurance policies. The living trusts and the wills take care of everything, even homes for the Daschunds.

    Remember, no one gets out alive.
    We all die at some point.
    Tomorrow I go to the VA for my first physical in 2 decades.
    Lets see how that turns out.