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Discussion Starter #1
I've been trying to determine if we are self-insured as far as life insurance is concerned. With people discussing various insurance types in the emergency fund thread, I thought it seemed a good time to ask for help.

Some context. We have a relatively high net worth (>1M) for our early 30s. As a family unit we bring in decent money, although only one of us is being paid to work with the other is raising our 2 children. Both children are under 2 years old.

We've avoided life insurance to date because we've always seemed ahead of the curve as far as available funds. As well, both of us were working and we had very little debt. If one of us were to die, the other could keep working and live the same life... financially speaking. Now that we have 2 children, and one of us is no longer working, we need to make sure we are making a responsible choice.

What are your thoughts on criteria that would make a person self-insured? Alternatively, if you believe that a parent shouldn't be self-insured, can you please explain why, and maybe what your thoughts are on determining how much life insurance one needs.

Thanks for reading. Your thoughts are much appreciated.
 

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Good questions.

I'm not self-insured for life insurance, in my view, and here are the factors that go into my assessment of this:

- present value of expected future earnings. This can be a very large sum. (Not that you necessarily want to buy insurance that covers this whole amount or relate to it as a liability, but it is a factor in thinking about the financial impact of the loss of one spouse.)

- retirement goals. You need to fund not just immediate expenses and immediate goals, but needs/preferences to the end of your life. Right? Sp what kind of retirement do you want the surviving spouse to have?

- legacy goals / kid goals. If you/your spouse had remained alive, you would probably continue to build wealth for future-oriented goals - whether that is leaving a legacy to your kids, helping them while they are alive, or leaving a different kind of legacy (i.e., charitable).

I mean, those are things you've probably already thought of. But in case this is helpful, those are some of the factors in my own decision-making process. And, for what it's worth, you are much much more likely to become disabled during your working lifetime than you are to die (which is part of the reason why disability insurance is so much more expensive than life insurance), so you might want to think about transferring some of that risk over to an insurance company as well.
 

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with two young kids and having made the decision to have a stay at home parent, you should at least consider enough life insurance to bridge the time until the kids are in full time school and the surviving spouse can work. In your early 30s a term policy should be pretty cheap.

ask yourself: what would happen if either spouse died -- either lose income or add need for childcare.
what would happen if both died -- do you have enough for the kids (and an appropriate plan set out in your wills).
 

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>1M does not narrow things down very well. If your NW is 1M exactly and your house is 40% to 50% of that then you need a ton of insurance (or I should say your spouse needs a ton on you). If your NW is in the 10M range, your dependants will probably get by just fine.
 

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I think you need to look at a few different scenarios.

The networth is only good if both parents pass away, then everything can be liquidated and handed to the kids for their care and up bringing. If only one spouse passes away, the other still has to live, raise the family, and retire still. If that networth is the house and retirement funds, then this really isn’t enough. If the primary income earner passes, will the other spouse be able to find work at an income that will cover off the expenses, and childcare. If the stay at home parents passes, will the income of the primary income earner be able to cover off full time care. These are just some high level considerations.

We are in a similar situation, with 2 young children, and higher networths also in the >$1Mil, except we both work. We decided that insurance was required until our youngest is out of university. We figure if only one dies, then the insurance will give the opportunity for the other to have the choices on whether they stay home or hire child care. It would also cover off future expenses such as educations, and retirement. If we both die, then our kids will inherent a lot.
 

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I think if anything, you should be looking at disability insurance for the primary income earner. Insurance is all about making sure your dependents are taken care of financially. If your spouse were to pass away, even though you could go back to work, your kids would need some kind of childcare. Depending on where you live, it's likely an extra $2k a month or so. Personally, I would purchase a cheap term insurance policy in case the worst were to happen.
 

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If your NW is 1M exactly and your house is 40% to 50% of that then you need a ton of insurance...
That's a very good point. I know a few people with NW in the 1M-2M range, but ALL of the NW is in their house. This is very risky in my eyes, considering that we are in a major RE bubble. On a brighter note you can get a term life insurance for 10 or 20 years, for the entire mortgage amount (assuming there's a mortgage involved) for a low premium (considering they are in good health and are non-smokers).
 

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Discussion Starter #9
Thank you to all that have responded. Sorry for the delayed response, but very much on topic, life is sometimes unpredictable.

@Four Pillars - Thanks for the link. You made an interesting case to get me thinking about why I would want life insurance (specific use vs future income). Considering this, I'd be more along the future income path.

Our dividends/distributions currently cover 80% of our non-investment expenses. It would probably stay at a similar percentage if we removed the expenses of 1 parent but added child care. If I understand the linked blog, for survivors that don't intend to work, we should each have enough insurance to produce an income equivalent to that 20% expense shortage, plus an amount to cover new investments. As well, We have an investment loan, so we should consider life insurance to cover the loan amount.

@MoneyGal - Those are interesting considerations and will help us in our overall decision making.

Re: Disability Insurance (MoneyGal and FT)
We are already covered for disability insurance. That's one insurance I think people need to take very seriously. If someone passes away, some regular expenses go away. If someone becomes disabled, expenses would tend to go up. I don't know if it's scare tactics, but the stats I was seeing when researching DI was that for someone in their 30s there is a 15% to 33% chance you will require usage of disability insurance in your life.

Re Schooling and Childcare (Charlie, Plugging Along and FT)
Those are good points. Childcare for 2 children where we live would be around $1600/mo until they are school age (4-5). While we do expect my children to contribute to their education costs to make sure they value it, we do want to help them through it. Especially since we expect they will both be doctor-lawyer-accountant-astronauts.

Plugging Along you bring up one of the things I have had trouble wrapping my head around. If someone is working, and their spouse dies, would you expect them to suddenly and permanently stop working. I can understand a break but I would tend to expect that after a break of maybe a year you'd want to get back to work, assuming you enjoyed your work. If you didn't enjoy your work, I suppose it becomes more complicated.

@FT - what's your opinion on how you would go about determining how much "cheap term insurance" to get? Just enough to cover childcare?

Re: Our net worth (OptsyEagle)
I wasn't really looking for a ye or nay based on our net worth, but if it helps the overall picture, we're around 1M in financial assets. I do not consider our house, which is paid off, a financial asset.

I'm really interested in what criteria people use to make their decisions on whether or not they need life insurance. How much is needed should be relatively easy to figure out after determining that you need it, assuming the criteria used is not just emotional or subjective. For example, saying you want to have LI to cover university costs can be reasonably determined. Saying you need LI to sleep better at night could possibly mean you are obtaining some arbitrary LI amount, and are possibly getting either too much LI or not enough.
 
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