Life Insurance – What we Own and Why?

I get questions all of the time from friends and family asking about life insurance; what we own, why we own what we do, what do I recommend for them, etc.  So, I decided I would fully disclose how we set up our life insurance plan and the changes I’ve made to it recently.

Disclaimer:  I used to be a licensed life/health insurance agent in Georgia, Florida, and Tennessee while also holding the series 6 and 63 securities licenses.  I no longer hold these licenses because I have no need to ever sell any life insurance, annuities, variable annuities, or mutual funds ever again.

What do we own?

We are a family of 4.  My wife and I are both 36 (she’s my older sugar mamma by a few months, haha), our daughter is 5 and our son is 2.  I also hold a policy on my nephew who is 6.

Me:  $1,000,000 15 year term policy purchased in 2016 (Protective Life through PolicyGenius)

Wife:  $1,000,000 15 year term policy purchased in 2016 (Prudential through PolicyGenius)

Daughter:  $25,000 Term to age 30 purchased in 2013 (Modern Woodmen of America)

Son:  $25,000 Term to age 30 purchased in 2015 (Modern Woodmen of America)

Nephew:  $25,000 Term to age 30 purchased in 2013 (Modern Woodmen of America)

**We also have a few random smaller policies through work, affiliations, memberships, etc that are no cost to us and I couldn’t even tell you the face amounts on them.  I treat them as a bonus, because they could go away at anytime and I have no control over them.

What does this cost us a month?

Me:  $26.36

Wife:  $27.22

Daughter:  $3.50

Son:  $4.00

Nephew:  $4.00

Total monthly cost:  $65.08

That’s it, for just $65 we have our family protected in case a tragedy happens.  I know that my wife and kids will be ok with enough money for food, shelter, and clothing for as long as they need it if I were to be run off into a ditch driving to/from work today.  That gives me tremendous peace knowing that.  If it came to having either cable/new car/cell phone/fancy clothes or being able to afford life insurance…I would chose the latter every day of the week.  But, that is me.  What are your priorities?

Why do we own these policies?

Because it would be irresponsible and selfish not to…

The Adults…

Ok, so lets talk about why we both have 1 million in coverage.  It’s simply the amount I think that could produce a sufficient income for the remaining family.  If I handed my wife 1 million today to live off of, I would have her employ 1 of 2 strategies.

1. Deposit it with either Vanguard or Schwab in one of their total stock market index funds and instruct them to start sending 4%-6% ($40,000-$60,000) annually to her checking account, divided over 12 months, depending on how much she thinks she needs.  That’s equivalent to earning $52,000 to $78,000 a year from a job, factoring in taxes and work expenses, etc.  This gives her plenty of extra annual income to make sure her and the kids have adequate food, shelter, utilities, and clothing for a long time.  I can sleep well at night knowing this.

Why 4%-6%?  If you have poked your head around retirement articles at all, you might be familiar with the 4% safe withdrawal rate in retirement proposed by investment professionals based off of the findings in the Trinity Study (explained by MMM)  (Also explained by JL Collins). This study showed that if you start by withdrawing 4% of your asset balance when you retire and then increase that amount each year by the Consumer Price Index (CPI)…inflation…that you have a very high chance of NOT running out of money over a 30 year time frame.  The chances are also still pretty good if you start with 5-7%, but finance folks don’t like to talk about that because it’s not as much of a sure thing and they don’t want to get in trouble or sued.

2.  The second option she has is to continue building our current portfolio of dividend paying stocks and closed end funds (CEF’s).  I have a list of all of the companies/funds I would want her to buy and instructions on how to do it.  She knows to instruct the custodian to set the dividends received every month to be deposited to her checking account and she could spend that amount in any way she wanted.  The vast majority of the companies on my list have increased their dividend every year for decades now, so she could expect a healthy increase in income from the portfolio every year that most likely will outpace inflation.

This option is a little more work but well worth it.  She now could live solely off of the income produced by the portfolio without spending down any of the principal, therefor guaranteeing that she never runs out of money.  This portfolio could live on in perpetuity, providing an income to our kids then their kids.  She would also have the opportunity of transferring some of these assets later on to a charitable giving trust if she felt so inclined…I told her to just make sure my name is on the plaques too, haha!

The Kids…

We own these policies for basically 2 reasons…neither one being the $25,000 face amount.

These policies are guaranteed to age 30 (as long as I pay the premium) and has a built-in guaranteed conversion rider.  Meaning that if something happened medically to the insured child causing them to be “uninsurable,” I have the right to convert their policy to a new Term or Permanent policy at a standard medical rating, without having to do a medical exam.  For example, lets say my daughter is 29, getting married and has a medical condition that makes her uninsurable, but wants to have a life insurance policy to protect her future husband and kids…I can now convert this policy for her. Simple as that!

Why else?

These policies also come with an additional free member benefit, (separate from the actual life insurance payout), called the Orphan Benefit.  If something were to happen to both me and my wife, then the person who becomes the guardian of our kids will receive around $300/month/child to help raise them…and the kids also get college scholarships (I believe it’s $16,000 per child) all paid by Modern Woodmen.  No one can tell me that this peace of mind is not worth a couple of bucks per month!

**I’ve seen so many people burned by having all of their life insurance through their employer (because it’s cheaper).  No one plans or expects their company to go out of business, be laid off, fired, downsized, early retired, or whatever else you want to call it…but it happens and people lose access to their policies.  They are now older and have usually developed some medical condition that increases the premium price in the open market.

Why 15 year terms?

Well, our financial independence plan clearly calls for us to be free from being forced to work within 15 years.  By then, our portfolio of stocks/funds/real estate will be producing enough income for our family to provide for all of our needs.  By then, life insurance will be a want and not a need, as it is now.

What have we previously owned?

I bought my first policy after getting out of the military and marrying my beautiful wife.  I went through USAA and purchased a $1,000,000 30 year term policy.  I knew I wanted kids someday and I wanted to make sure the time frame covered them.  I was young, healthy, and in the best shape of my life….great time to qualify for life insurance.  I want to say it was about $79/month

I then went to work for Modern Woodmen of America as a life insurance agent, and naturally switched our policies over to them.  My wife and I both bought $1,000,000 30 year terms.  I paid $84.17/month and hers was $61.67/month.  We also added the Return of Premium Rider to both policies that almost doubled the payments, but ensured us that we got back all our premiums paid at the end of the policy.  It worked out to a 4% IRR (Internal rate of return) which is pretty decent.  Where else can you get a guaranteed 4% return these days?  I canceled the rider after realizing my priorities were out of order…in no situation does it make sense to use extra money to make 4% when I could have been using it to pay off higher interest debt like credit cards, student loans, car loans, etc.

With our current plan for financial independence, and realizing that we no longer needed the length of coverage that our 30 year terms provided, there was no reason to keep paying extra on them.  That’s when we went through PolicyGenius to get prices for new 15 year terms, and now pay the prices you saw at the top of this post.  That’s a big difference in monthly cash flow for the same amount of coverage!

We also had small permanent life insurance policies for all of us at one time…but those are a complete waste of money if you are not yet debt free and fully maxing out your retirement accounts.

My Recommendations

  • Only buy what you need, not what an agent makes you think you want.
  • Buy enough coverage to take care of your family’s basic needs, more if you want – just don’t let it take away from other needs in your life.
  • Shop your policies at least every 5 years…the actuarial tables are changing constantly and the cost of life insurance has dropped dramatically over the years as competition has increased and people are expected to live longer.

That’s how this family of 4 does life insurance.  Does my strategy make sense to you?  Do you disagree with my strategy?

I’ll have a more technical post later on the different types of Life Insurance, but I wanted to disclose what we own first.

The only link on this page that I have a financial relationship with is PolicyGenius, if you submit an application with them for term life insurance then I will receive $75 for making the connection.  If you decide to use them then I thank you in advance for helping me cover the cost of running this blog.  Thanks!

Have a wonderful day everyone!

-Chad

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4 Comments

  1. Mrs. Groovy

    Chad this is a great post. I think your strategy is spot on. I

    I never heard of the Orphan Benefit but that’s provides a strong reason to insure children, as does the conversion rider. I’m amazed at how little it costs to cover them.
    Mrs. Groovy recently posted…Personal Finance and EthicsMy Profile

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    1. ourdimeourtime@gmail.com (Post author)

      Thanks so much for the kind words Mrs. Groovy. Life insurance is that weird spot in the financial arena that many don’t like to talk about. It’s misunderstood and in many instances used improperly.

      Modern Woodmen really is a great company but I couldn’t make a living out of just selling those kids policies and term products so I had to move on.

      Thank you for commenting!

      Reply
  2. TJ

    Thanks to this post, I’ve gone down the rabbit hole of the Fraternal Benefit Societies? 😀 Curious why you didn’t just get 15 year policies with Modern Woodmen?

    With them being not-for-profit, you’d think the rates might be better.

    Regardless, I love that idea of buying cheap life insurance on kids that can be converted to age 30 (i see they also have a to 18 option) in case something happens.

    I don’t understand why people are so against life insurance on children. My parents bought a permanent policy (universal, I think) on me when I was born in 1985. They said if I don’t get married, they’ll just make my sister the beneficiary. They see zero reason to sell it. I understand it still has a pretty high guaranteed interest rate because it was bought so long ago. It might not have been the best use of their money at the time, but they certainly could have done a lot worse, and if something tragic did happen, they wouldn’t have to dip into their life savings to bury me.
    TJ recently posted…January 2017 Financial RecapMy Profile

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    1. ourdimeourtime@gmail.com (Post author)

      TJ, Fraternal Benefit Societies are pretty great and do a lot of awesome things in the local communities they serve. But, don’t assume that just because they operate as a not for profit (501c8) that their rates will be lower. Of course I shopped them first but my monthly rate was going to be in the $39 range as opposed the $27 I found elsewhere. No reason to pay more for the exact same thing…I needed every dollar I could get my hands on since we were aggressively paying down debt.

      Let’s face it, most of the whole life products sold to parents for kids are pretty crappy…the policies I have through Modern Woodmen for my kids are essentially term products. I think the reason so many people are against life insurance for kids is that the salesman puts it way higher in the priority list for most families then it should be. I met with many families that were still in debt, not saving a dime for retirement, but were funding whole life policies with Gerber or some other life insurance company. Permanent policies on kids are a luxury and should be treated that way in families overall financial plan…if everything else is in order then sure go ahead and pick some up, I could definitely argue that there are better uses for those extra dollars though.

      Your parents sound like very smart people and I would guess they have their financial house in order.

      Thank you for commenting TJ,

      Reply

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