Our case study family is a little older now. They have experienced some changes with some ups and downs. Ten years covers a lot of ground with a growing family. Let’s take a look.
Learning & Growing – The Active Family
Jeff (35) and Lisa (35) now live in Bountiful, UT, just north of Salt Lake City. They bought their home 9 years ago after the birth of their second child, Chad. Their oldest, Chloe is now 12 years old and Chad is 10. Four years ago, they welcomed their third and final child into their family (Jeff had a vasectomy after Chelsea was born). Chelsea was a welcomed surprise!
All of their children participate in extra-curricular activities. In addition to piano lessons, each of them is involved in one sport/performing art. Chloe has always loved to dance. She has been an avid ballerina for a number of years and is now interested in Jazz dance. Chad is passionate about baseball, both playing second base in little league and watching his favorite team on TV. This is Chelsea’s first year of ballet, though she is showing a strong interest in baseball. She thinks it’s more fun than dance.
The Job Front and Personal Finances
Jeff has a great job that he loves; this hasn’t always been the case.
- Jeff was laid off about 2 years ago and didn’t work for 6 months.
- He found a part-time job, unrelated to his career. It helped to get them through that year.
- Lisa did some substitute teaching, which helped a lot.
Jeff’s year of unemployment/underemployment created a strain on their savings, and their kids had to take a break from their extra-curricular activities.
They were grateful their life insurance design allowed them some flexibility.
- They suspended premium payments on their Permanent Life Insurance policies and still retained the coverage.
- They used some of the built-up equity from their Permanent Life Insurance policies to pay for the premium due on their Term Life Insurance policies to keep them in-force as well.
- This benefit helped them keep their life insurance planning in-tact as Jeff was diligently seeking a new career opportunity.
Eventually, Jeff landed a great job with a starting salary just a bit higher than his last full-time job ($65,000). It took some time to get back on their feet. Jeff and Lisa are now back on track and they were able to return the money they borrowed from their Permanent Life Insurance policies. Their kids have returned to piano lessons, baseball and dance. Jeff and Lisa have also replenished their savings and feel financially secure again. Thankfully, they did not need to dip into their retirement accounts.
Jeff has already begun to move up the ladder with his new company and has started to earn bonus compensation.
- Jeff’s annual income with bonus is $78,000 ($6500 per month).
- He has group life insurance coverage of $300,000 with his new employer.
- Jeff’s employer also provides Lisa with group life insurance coverage of $75,000.
- Lisa is now back to raising the children full-time.
Jeff and Lisa decided that, as long as Jeff is able to provide for their family, Lisa should not go back to teaching until Chelsea is a full-time student in two years.
Growing Needs
Jeff and Lisa have also decided they need a different home for their family’s ever-changing needs. They have really enjoyed their first home, but with 3 children (one a pre-teen), they feel they need something a bit bigger where all of their children will have a private bedroom.
They decide to sit down and go over their finances to see what they can do to improve their family living environment. Lisa also wants to look at their life insurance needs. They go to the SimplisLife Insurance Calculator and run the numbers.
Jeff’s Short-Term and Mid-Term Need
Jeff and Lisa want to make sure their family has adequate protection until their youngest child is at least 18 years old. Chelsea, their youngest, is 4 years old.
- 14 years of Jeff’s current annual income equals $1,120,000.
- They estimate their new home will create a mortgage of $300,000 after they transfer the equity from their current home. All other debt equals $20,000.
- They still want to provide for their children’s higher education needs (now $180,000 with the addition of Chelsea).
- Jeff’s total short-term and mid-term need is $1,620,000.
Since Lisa is able to teach full-time, if necessary, and their children are a bit older now, they decide to consider her income earning ability in Jeff’s life insurance need. In other words, her potential income can reduce his life insurance need.
- Jeff currently has a $1,000,000 Term Life Insurance policy with 10 years left before it terminates.
- He also has $300,000 of group life insurance through his employer.
- Jeff’s current coverage for his short-term and mid-term need is $1,300,000.
If Jeff dies, Lisa could pay off the debt ($320,000) and set aside $180,000 for their children’s higher education. She would still have $800,000 left to raise their family and provide for her own long-term needs. It seems like a lot of money; however, it amounts to a little over 10 years of Jeff’s current income level. With no house payment, Lisa would be able to stretch the money further. Including her projected income from teaching, their family is adequately protected at Jeff’s current amount of life insurance coverage. They decide Jeff has enough coverage for their current needs. That could change 10 years from now when his Term Life Insurance policy terminates.
Looking Down the Road
Jeff’s curiosity kicks in and he begins to wonder how much the same coverage would cost at his current age. Remember, he secured his existing policy 10 years ago, when he was 25 years old. He goes to the Simplis Life Insurance Quoter to find out. He uses the slider tool to adjust the coverage level to $1,000,000. He’s still in good health, but sitting at a desk for the past ten years has added some girth to his physique. Jeff will qualify for above-average health, not excellent health.
- For a $1,000,000, 20-year Term Life Insurance policy, on a 35-year old male with above-average health, the premium is $50.52 per month.
Jeff is shocked! That’s a 34% increase over his current $1,000,000 term policy he secured 10 years ago! “What will it be 10 years from now if my health doesn’t change?”, he wonders.
- For a $1,000,000, 20-year Term Life Insurance policy on a 45-year old male, with above-average health, the premium is $111.56 per month.
“Wow!!”, he thinks. “That’s a lot to pay at a time when I’m also helping my kids with their college education.” He becomes increasingly determined to improve their financial position over the next 10 years so he doesn’t need so much life insurance.
While Jeff feels good about his current life insurance situation, he is also glad to know what he is looking at in the future so he can begin to prepare. His current term policy is up in 10 years and he feels his family will still need some protection at that time.
Lisa’s Short-Term and Mid-Term Need
Lisa is the primary caregiver for the family. Jeff and Lisa want to make sure their family has adequate protection until their youngest child is at least 18 years old. Chelsea, their youngest, is 4 years old.
- Based upon their children’s ages and the average cost to raise a child,the Simplis Life Insurance Calculator estimates Jeff would need $310,000 over the next 14 years.
- They estimate their new home will create a mortgage of $300,000 after they transfer the equity from their current home. All other debt equals $20,000.
- They still want to provide for their children’s higher education needs (now $180,000 with the addition of Chelsea).
- Lisa’s total short-term and mid-term need is $810,000.
Since Jeff is able to work full-time, they decide to consider his income earning ability in Lisa’s life insurance need. In other words, his income can reduce her life insurance need.
- Lisa currently has a $700,000 Term Life Insurance policy with 10 years left before it terminates.
- She also has $75,000 of group life insurance through Jeff’s employer.
- Lisa’s current coverage for her short-term and mid-term need is $775,000.
If Lisa dies, Jeff could pay off the debt ($320,000) and set aside $180,000 for their children’s higher education. He would still have $275,000 left to raise their family. Not quite the $310,000 estimated as the cost to raise their children. With no house payment, Jeff would be able to stretch the money further. Including Jeff’s income, their family is adequately protected at Lisa’s current amount of life insurance coverage. They decide Lisa has enough coverage for their current needs. That could change 10 years from now when her Term Life Insurance policy terminates.
The Short-Term vs The Long-Term
It’s important to understand why we do not include Jeff’s and Lisa’s Permanent Life Insurance death benefits in our calculations for needs such as, income replacement, debt payoff, etc. The Balancing Act strategy includes Permanent Life Insurance policies for final expense needs. Final expenses can include such things as:
- Funeral costs
- A final family vacation trip
- Time off work to attend to the needs of the ailing parent
- Uninsured medical expenses, such as experimental or alternative therapies
- It may also include expenses related to family counseling after a parent/spouse dies
You just don’t know what your family will need until you get there. The need to grieve can be expensive, so the final expenses policy is not included in the ongoing future expense needs for the surviving family.
If Jeff and Lisa are like most people, they will outlive their Term Life Insurance policies. In that case, they will always have protection for final expense needs when they are older, if they retain their Permanent Life Insurance policies.
Summary
Jeff and Lisa have been very happy with the life insurance design they started 10 years ago:
- A large amount of protection through their Term Life Insurance while they are young and have a lot of financial obligations.
- A small amount of protection through their Permanent Life Insurance to cover final expenses either now or far into the future.
Sufficient life insurance is there for their family should it be needed. They have already learned the value of the living benefits that are offered with a Permanent Life Insurance policy:
- They suspended premium payments on their Permanent Life Insurance while Jeff was unemployed/underemployed.
- They used some of the equity in their Permanent Life Insurance to pay the premium due on their Term Life insurance to keep it in force while Jeff was unemployed/underemployed.
Jeff and Lisa have been able to provide and sustain the protection their family needs. They are pleased with the current tax-free cash accumulation of just over $14,000 in their Permanent Life Insurance policies, and they look forward to even greater cash growth over the next 10 years.
Stay tuned, our next blog post, Case Study – The Balancing Act ℠ – Part 3, will take one more 10-year look down the road with our case study family – to an important time for any family with children; the transition to an empty nest.
Questions? We have answers. Contact a Simplis professional today, online or (888) 385-1711.
