For this financial tip I am going to encourage you to think about something that will happen to all of us, but none of us want to think about: Death. I hate the idea of death. Yes, I know that some believe there is an afterlife (I am one of those believers) and some do not. That doesn’t make a difference. Death will happen to all of us and many of us will have families. One of the things you have to consider is how do you protect your family if, god forbid, something happens to you?
Certainly one of those strategies is to self-insure by becoming filthy rich, but in the interim, I think it in incumbent upon all people to at least get some life insurance. I don’t consider life insurance a luxury. I consider it a necessity and I have some coverage (I am going to get more) to take care of Mrs. ROB and my family if something ever happens to me and vice-versa.
What Kind of Life Insurance Should I Get?
Generally, there are two kinds of life insurance (yes, I know that there are other products out there, but I am talking generally): Term insurance vs. Permanent (Whole Life) insurance. Term insurance is basically where you agree to get a life insurance for a certain amount for a certain amount of time. For example, you might get life insurance that is for a 20 year term (the policy is good for 20 years from the time you take it out) and is worth a certain amount of money (maybe $500,000). You pay monthly premiums, just like your car insurance or whatever, for the term of the insurance policy (20 years). If you die before the term policy runs out then those monies will be paid to your beneficiaries. Your monthly premiums are determined by your health, lifestyle, etc and will be locked in for the term of the policy (e.g. $40 a month for the next 20 years). If you are an unhealthy person (smoke, do drugs, etc) your premiums will be greater than someone who doesn’t engage in unhealthy behavior.
Whole life insurance, similar to term, has a specific death monetary benefit (e.g. $500,000). One of the differences between term and whole-life is that you pay premiums for the whole life of that person. In other words, there are no specific terms (10 year, 20 year, 30 year). However, those premiums help create a “cash value” for that policy. In other words, if you were to cancel the whole life policy you could get the cash value of the premiums you have paid into the policy. Sounds great right!
The Best Type of Life Insurance Is______________.
The best type of life insurance really does depend on the person, but in general I think TERM INSURANCE is the best. Typically, term insurance is cheaper than whole-life in terms of its monthly premiums. You only have it for a specific amount of time, and you can certainly cancel it really any-time you need it.
Now you might be asking: Jason, whole life insurance gives you the “cash value” if you cancel the policy? You get your money back if you have whole life. Sounds great right? Not really.
The problems with whole life outweigh its benefits, in my opinion. Here are some reasons why:
1) The monthly premiums for whole life are typically higher than for permanent (whole life) insurance. You can take the lower premiums from the term policy and invest them on your own.
2) The fees involved getting out of the whole life policy are actually pretty expensive. So if you do try to cash it out you will actually not get a lot of money back from the whole life policy after all the fees are taken out.
3) Whole life insurance is a poor investment vehicle. Some people use whole life insurance as an investment. They pay a specific premium and are attracted by the potential rate of return. However, after the fees you pay and the low rate of return you would be better off putting that money in a good investment or maybe even in a high yield CD or savings account. To me it just isn’t worth it.
4) Insurance agents and financial brokers actually make a good chunk of change from selling permanent insurance. Now I don’t have a problem with people making money, but it is not worth the fees and extra premiums that go to that broker, when I can get a cheaper policy, take that money that I would’ve spent on whole-life and invest it on my own.
Term insurance is a better deal in my opinion.
There is one caveat to that. If you already have a whole life policy and it is the only insurance that you can get because of health reasons or whatever then I would never cancel the policy. Keep the insurance you have. However, if you have to make a choice right now I think TERM is better for the average life insurance consumer.
How Much Life Insurance Should I Get?
Again, this question depends on your situation. A lot of people have small life insurance policies through their employer. For example, I have a small insurance policy of $5,000 in case something happens to me. Additionally, I get a benefit of having a specific amount of insurance depending on how long I have been with my employer. For example, if I have been here 10 years I might get 2 times my salary. If I am here 15 years I get 1.5 times my salary.
That isn’t a bad start, but a good rule of thumb I try to follow is that you should have a life insurance policy of 8-10x your annual income. So if you make $50,000 then you should have $400,000 to $500,000 of coverage. Now that sounds like a lot, but if you are in good health life insurance premiums, even of that size might run you $40-50 a month. That isn’t bad and it is a small price to pay to ensure your family has safety. I have 8 times my salary and I get the life insurance through my employer. Ultimate, the premiums depends on your health and age. The older you are and the worse health you are in the larger your premiums will be.
How Long Should You Have Your Term Insurance?
Again, this question depends on your situation. I think that a good rule of thumb, if you have children, is until those children are out of college. So if you have children who are school age maybe you get a 20 year term policy or stretch it out to a 30 year term policy. If you have children who are older and near college age perhaps you only do a 10 year policy. It really is up to you and your situation.
You might also consider life insurance if it is you and your spouse. This might be especially true if you are newly married and are just building your financial lives. Because you don’t have a lot of money saved you might take out a little bit of insurance to replace that income or to cover paying the mortgage on your house. However, if both partners are working, no kids, no house or anything then the need for insurance is lower.
Some people take out term policies their entire lives because they like the security of having insurance. If that works for you and you can afford it GREAT! Do it, but know that your insurance premiums go up the older you get. And the more money and assets you accumulate you might not need insurance as much.
What About Spouses Who Stay At Home?
I think if you have a spouse who stays at home with children or other dependents that it is important to have life insurance for that particular person. According to various studies, the average stay at home parent, if they got paid makes anywhere from $50,000 to $100,000. That is a fairly big range.
Because of that it can be fairly hard to judge how much life insurance to take out on a stay at home spouse. I would, at the very least, put a value of 5 to 10 times what the average spouse does. So that might mean coverage of $250,000 and up. Again, this is up to you, but stay at home spouses do an invaluable job and if they pass then somebody has to take care of your children. The working partner might not be able too so then you have to hire day care/nanny services. Having insurance on the non-working partner gives one peace of mind.
Finding Life Insurance
Finding a good life insurance agent/company can be daunting because there are so many out there. This is where you might want to take your time. Schedule interviews with some agents, ask for referrals from your friends, etc. Don’t fall for the pressure job of some agents who might try to sell you products you don’t need.
To avoid that I went through my work because I got a discount for the insurance, but I still had to fill out the application, have a physical, etc.
We spend more time planning our vacations than we do thinking about the future. To me that is unacceptable. Taking care of your family is the most important thing you can do. Take the time to make this a priority.
The Bottom Line
Life insurance is part of any financial plan. It isn’t for everyone. If you are single or have a working spouse, no kids, and no assets you might not need it. However, if you have a family, just bought a house or larger assets, I think some life insurance is a must. No one wants to think that they will go early, but it is too important to not deal with it. I didn’t like thinking that Mrs. ROB would get a check if I croaked early and she makes a good living with or without me. But with a new house and potentially a family in the future it is important for me to try to plan for the future and life insurance is one of those options.