WCI Financial Boot Camp- Life Insurance
You guys, I’m so glad I’m going through WCI’s new book. There have been so many things on my mental to-do list that this process is helping me get through. Are you going through it with me? You totally should. Up today: Chapter 2: Life Insurance.
My husband has been mentioning that he needs to increase his life insurance coverage. He has a $300k policy from when he was a grad student. Now that he’s working full time, he can get a $1Mil policy. I have a $1Mil policy for myself.
So, right now, we have $1.3M plus work policies. Sounds ok right? But, how much coverage do we actually need?
Who Needs Life Insurance?
Anyone who has anyone depending on them. If my husband and I die in a plane crash tomorrow, I want to know my kids will be taken care of financially until they can make their own money. Morbid, I know, but practical. And it will help you sleep better at night… and on a plane.
How Much Life Insurance Do We Need?
We need enough to pay funeral expenses, maintain the family’s current lifestyle, pay off our debts, and pay for future expenses like college.
First, we need enough coverage to maintain the current lifestyle. Our monthly expenses right now are about $5k. So, 5k x 12 months= $60,000 for yearly expenses. At a 4% withdrawal rate, we’ll need $60k x 25= $1.5M.
As an aside, that’s also how we calculate our Financial Independence number. The premise is $1.5M will earn an average of 7% returns per year, if invested. Assuming a 3% inflation rate, you have 4% returns on that initial investment. So, you can assume that if you take 4% out each year, live off of that, and you will never have to draw down your initial $1.5M. So, your money will continue to make you money for a long time.
So, getting back to life insurance, we need $1.5M to maintain current lifestyle. Plus enough to pay off debts (rest of the mortgage on the rental property). Add to that future college expenses- I’m guesstimating $100k per child. Then, subtract out current next egg. Round that number up to the nearest million.
For my family, that number comes out to $2M. So, we are a short here on the coverage with $1.3M coverage.
“Your Life Insurance Need Add up: Monthly expenses x 12 months x 25 Remaining mortage amount Estimated college costs Large ticket items Non-forgiven Private Student Loans Subtract out: Current nest egg Current college savings Then round up to the nearest million.” – Dr. James Dahle, WCI Financial Boot Camp
What Kind of Coverage Do We Need?
Don’t say whole life. Just don’t do it.
Term life is the way to go. Why? Many, many reasons, but a big one is if you’re on the financial independence path- you won’t need life insurance for your whole life. Once you reach financial independence, you can self insure and drop this monthly expense.
How Long Of A Term Do I Need?
So, term life is the way to go. How long of a term do you need? For however long it takes to reach your FI number. WCI teaches a nifty way to calculate this in Excel. It’s called the NPER calculation, which is built into excel.
According to the calculation, it will take us 9 years to reach financial independence. We bought 10 year policies in 2016, so they expire in 2026. So, we’ll be cutting it short by 2 years. I think we’ll ladder 2 more policies. Josh will buy a $500-1M policy for 10 years and I’ll buy another $500k 10 year policy. That way, we’ll have 4 policies totaling 2-2.5M for the first 8 years, and 1-1.5M for the last two years. We’ll have less need then so we’ll need less coverage. Good thing we worked through the numbers! Time to take more action.
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Standard Disclaimer: Not meant as individualized financial advice. This post contains affiliate links.