I have $1,650,000 in term life insurance.  That is a big number to a lot of people.  Here’s the thing, it does not go as far as you think it might. If something happens to me I’ve told my wife this is how I want it distributed.

First, use $150,000 or so to pay off the house, car, etc.  That leaves $1,500,000.  Second, put $250,000 back for each child for educational purposes.  We have two children so that leaves $1,000,000.  Third, invest the last $1,000,000 and don’t draw off more than $45,000.

Paying off the debt is easily done if the money is there from life insurance.  It lowers the amount of money needed each month to pay bills and it provides peace of mind.  Two hundred and fifty thousand dollars sounds like a lot to put back for education and it might be…but it might not.  If they go to Pellissippi State and get an associates degree then there will be lots of money left over.  If they go to TN Tech or UT Chattanooga they can still get an affordable four year degree.  What if they are really smart and get into medical school or law school?  What if they can get into Vanderbilt or Duke?  I don’t want my kid’s future limited by whether or not they get a HOPE Scholarship or a grant.  If they get a four-year degree and a master’s degree $250,000 each might not be enough, but they won’t graduate with an absolute mountain of debt (hopefully).

Finally, the last million.  Why on earth would I instruct my wife to live off of such a paltry amount?  The answer is simple, so the money will last.  If she invests in the market (stocks, bonds, but mainly mutual funds) some years the nest egg will increase and some years it will decrease.

Just an example of a few years of returns.  Let’s say that I croak and my wife gets the checks from the insurance company.  So the first year she is just going to be withdrawing from the principle so her initial investment is $955,000.  Analyzing possible returns by looking at historical return for the S & P the last 15 years this is what happens to the nest egg…It’s still there, at least most of it ($870,047 after 15 years).  There is still enough to carry her into her retirement years, have a reasonable retirement, and possibly leave behind some to the kids (and or hopefully grandkids)…but it does shrink.

Let’s look at a different scenario.  Let’s say that instead of pulling out $45,000 a year she pulls out $90,000 a year.  In that case the entire nest egg is gone at year 20.  IF I were to die today (I have plans to actually outlive most everyone, but the best laid plans of mice and men….) that would mean she had nothing left to live on during retirement.  What about $65,000?  IF I were to pass today that would give her income till she was 73 years old and at that time the nest egg would be gone.  Variation of return in the marketplace can wreak havoc with anyone’s nest egg, so you have to live on a fairly small percentage of it if you want it to last.

So that million dollar policy provides my family with an income of $45,000 a year and it has a realistic chance of serving my wife all the way through retirement.  $1,650,000 of life insurance is a decent amount.  It’s doesn’t make anyone rich.  It doesn’t replace me (I’m one of a kind).  What it does is to give my family a fighting chance financially.  What could your life insurance do for your family?