How much life insurance does a couple need?

Marcia ThornleyMarch 9, 2009

Life insurance really confuses me. How much does a working couple with no children need, if any? The mortgage is paid off, so that is not a factor. Is it really necessary? What do couples do?

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Supposedly, it is meant to cover final expenses caused by the person's death, i.e. funeral, and any continuing financial obligations the deceased has to survivors.
If both of you are working, would the survivor need to
replace the income of the first-to-go in order to to maintain their standard of living?
For the second-to-go, would they wish for insurance to pay any inheritance/estate taxes to avoid having the estates assets sold to pay them?
Depending on your situation, the problem can get a lot more complex, or not.
You didn't ask about it, but I recommend looking into long-term-care insurance to help with essential care when it is beyond your own ability.

    Bookmark   March 9, 2009 at 8:09PM
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First off, you need to decide what you want insurance for. Some of the reasons could be:
- Income replacement for surviving spouse
- Mortgage payoff
- Children (education, etc.)
- Retirement

Level term is usually the least expensive method of obtaining insurance. Term periods are usually 10, 15, 20, 25, or 30 years. Companies that specialize in this market include Metropolitan, Transamerica, USAA Life, and West Coast Life; there are many others. Use a company with a sound financial rating, of which there are certainly fewer than there used to be, LOL.

Income replacement: up to you to decide how much would be adequate recompense for a spouse's death. Generally it's recommended to have 5-10x gross annual salary, but your needs may be different.

Mortgage payoff: self explanatory. Get a level term policy for each employed person on the title, for the 15 or 30-yr term of the mortgage.

Children (education, etc.): again, self-explanatory

Retirement: In our case, I have insurance as a retirement backstop. My DH has the old-fashioned Defined Benefit Pension that is assignable to the spouse, along with a good-sized 401k/457 account. I, OTOH, have only some small annuities that kick in when I'm 65, and a very tiny IRA. I use life insurance to mitigate the risk to him that if I die before I start collecting (he would get nothing, in that case) this offsets the loss of that monthly income for a number of years.

Be aware that you need to be careful if the reason for purchase is estate planning. As most estates fall under the Federal Tax Limits, the majority of folks do not need an insurance policy for estate tax planning. These limits, of course, are changeable but general consensus is Congress will settle for the current $3.5M limit after 2010.

Although life insurance does not incur income tax, being a POD (Payable On Death) financial product, and thus bypasses probate, I believe that it IS counted in your overall estate total and therefore, can trigger the federal estate tax when added to your other assets.

To avoid this, there are two alternatives:
- Have the policy owned by someone other than the insured; e.g., a spouse.
- Set up an ILIT: Irrevocable Life Insurance Trust. You will need an attorney to do this, and sufficient cash flow to pay a considerable annual premium. This is usually a VUL (Variable Universal Life) policy, and is designed to move assets out of a taxable estate over time by purchasing an insurance policy which will eventually benefit the heirs by providing the cash necessary to pay any federal/state estate taxes (and providing liquidity with any remainder).

Life Insurance can help with estate liquidity, but it is not in itself an immediate solution. Whoever you name as Executor of your will or Trustee of your Trust, will not actually be able to access cash funds unless they are a co-trustee of a jointly owned trust account. Anyone else will have to wait until they have a certified copy of the death certificate to present. If there are no problems and the county is efficient you might have this in a week or two. If there are any suspicious circumstances necessitating police or coroner investigations, the Executor or Trustee might have to wait a while. In either case, each has a fiduciary duty to keep the estate intact as much as possible before dispersing the assets.

IOW, you can get life insurance proceeds fairly quickly - usually 2-3 weeks after they receive a copy of the death certificate. But your estate Executor or Trustee needs to start paying bills of the estate IMMEDIATELY upon death. This is something most folks never think about - there are legal and financial costs to death, and whoever's responsible for the estate had better have sufficient cash/credit up-front for at least one month, maybe two or three. They will get reimbursed from the estate, but it may take a little while. Just something to keep in mind!

    Bookmark   March 10, 2009 at 12:08AM
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A simple rule of thumb is 8-10 times your current annual income.

    Bookmark   March 10, 2009 at 7:10PM
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My bottom line with life insurance is this: If one person dies, what will be the financial needs of the other person to maintain his/her lifestyle indefinitely. Once that is determined, then get enough insurance so that the proceeds can be used to buy an annuity to provide that income.

    Bookmark   March 10, 2009 at 7:43PM
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I think it all depends on your financial situation. When my husband retired we canceled the insurance policies his company offered. We didn't think we needed it and we didn't. We don't believe in costly funeral services, his cost $1,000 and I prepaid mine, $600. We have very competitive funeral homes here.

    Bookmark   March 11, 2009 at 11:32PM
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I work in life insurance, and the experts recommend 5-7 times your salary. But if you don't have a mortgage or kids, I would think the lower # would be enough.

I agree with the above poster that you should look into long term care insurance. One year of LTC can leave your spouse broke.

And as for life insurance, there is a 100% chance you will die - but for LTC it's 2 out of 5 chance you'll need it. But if you need it and don't have it, that can be a tragedy.

    Bookmark   March 19, 2009 at 9:35PM
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Mommabird, the spouse won't be broke if they do a division of assets with SRS. Been there, done that. I kept the house, the car and half the other assets.

    Bookmark   March 20, 2009 at 8:50PM
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We have ZERO insurance beyond home, auto, umbrella. Used some whole life policies my DH's father had bought when DH was a child to borrow against when we bought our first house. (Extremely low interest.) Eventually we decided our savings was adequate to self-insure.

Re: Long Term Care insurance. Yes, quite a few people need some care, but most within our cohort do not need it for more than a few months -- often at the end of life. It seems to me that there is an over-representation of people in long term care who have not had good health care throughout their lives; this skews the numbers.

    Bookmark   March 21, 2009 at 12:23PM
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