I’m talking to a young man in his early 30s who happens to be the sole breadwinner for his family for now. This couple both want Mom to be able to stay home with their children, so among other things they’ve realized, they need to get some life insurance on Hubby.
How much coverage should they get and how long should the term be?
First, sir, your wife is giving up a great deal economically to stay home and raise your children. She is missing the formative years of a career, on which the later (and usually most fruitful) years are built. So, if something happens to you, you don’t need to make her rich, but it isn’t fair to ask her to “start over” late in life.
Suppose you earn $75,000 per year. If you failed to look both ways before crossing the street and met an early demise, how much of that $75,000 would you want your wife to continue to receive?
If you both determine that she needs at least $75,000 income, I’d suggest using a widely accepted “sustainable rate of withdrawal,” such as 3%. That’s the amount she should be able to withdraw annually from a portfolio, with a very low risk of the money running out. The number you come up with will be $2,500,000.
You can subtract from that figure any assets you’ve already built up, as well as subtract from the income figure needed any income she might otherwise receive (rents, interest, royalties, etc).
Let’s say you settled on $2,000,000 as the amount you want to provide in the event of your death. I’m going to assume you are in really good health and estimate that $2,000,000 of term life insurance will cost you (approximately) from $50 to $150 per month.
Why the wide difference? It all depends on how long you want to lock in the price. Ten year term would cost a healthy young man about $50 per month. If you wanted to lock it in for 30 years, that would be the $150 monthly cost. These are just estimates, and if your health isn’t perfect, the cost could be significantly higher.
Before you just pick a low price, think about what happens at the end of the term.
You are buying $2,000,000 of life insurance because you don’t have $2,000,000 in cash to leave your wife if you die. So, ask yourself what the probability will be of you having $2,000,000 ten years from now. Or twenty.
A longer term (often up to 30 years) will be the answer for many, since the need will be there for a long time.
Congratulations on taking a big step and doing such a selfless, loving thing as making provision for your wife and children in the event of your premature death. It’s a big deal that you are taking care of this.
Just be sure you think through all the issues deeply, work with qualified professionals and do the job right.
It may be the most loving legacy you could leave.
