Life Insurance: My Thoughts

Life Insurance is a topic that a lot of people really would prefer not to think about and it is understandable why. I mean, I don’t want to think about what would happen to my loved ones if I died, but nevertheless, it is something you should include in your financial plan in case the unthinkable were to happen.

This is a fairly in-dept post covering Who Needs Life Insurance, What are the Different Types of Life Insurance, How Much do you Need, How Much Does it Cost, and How to Pick the Right Company. If you’d like to read it in its entirity, just click on the continue link below.

So who needs Life Insurance?

I think everyone under retirement age who has individuals who depend on them for financial support should have some life insurance. The exception would be for the lucky few who have zero debt and are already very well off financially. However, most of us have a mortgage, children and/or a spouse who depend on our earning ability (which of course disappears if you die) in order to survive. So most of us need some type of life insurance in order to ensure that our loved ones will be able to maintain the same type of lifestyle in we are no longer there to support them. So now that we’ve determined that most of us need some type of life insurance, now you just need to figure out what kind and how much you need.

Types of Life Insurance

Well there are two main types of life insurance, whole life and term life. With a basic whole life policy you purchase a set amount of life insurance at a set price which never goes up and builds cash value throughout the life of the policy so that when the policy expires (usually at age 100), the cash value is greater than or equal to the death benefit.

The other common type of life insurance is term life which is for a specific term, (i.e 20 years, 30 years, etc.) does not build cash value and after the term expires, is gone. Term life is the cheaper of the two since it does not build cash value and in most instances will usually expire before paying a claim. For most people (and most financial guru’s agree with this), term life is the best choice since most people will no longer need life insurance when they are older, have raised their families, and paid off their mortgage, when it expires.

There are also various hybrids of these two main types including Universal Life, Variable Life, Declining Balance Term Insurance, etc. These policies are always more expensive than necessary and therefore I don’t recommend any of them.

How much do you need?

The amount of insurance you need depends on what your loved ones to be able to do with it. Insurance Agents have a questionnaire that they will usually go through with you in order to determine an amount and it goes something like this.

1 – Do you want your family to be able to pay off the mortgage on the house? If yes, then they start with the amount you owe. If you have other debts, (car payments, home equity loan, student loans, etc.) they’ll also add these totals in.

2 – Do you want to provide a monthly income to your family to replace your paycheck and if so for how long? (This is a big one!) If yes, then they take your annual income times the number of years you want to provide it for.

3 – Do you want to provide money for your children to go through college? If yes then they take the average cost for a 4 year education at a public college times the number of children you have.

4 – Do you want to provide for final burial costs? If yes then they take the average funeral cost and tack it onto the amount you’ll need.

There are various other questions they ask but as you may have guessed, the point of this little exercise is to get you to purchase as much life insurance as you can. Remember, these agents are paid on commission!

The final question they ask, after they’ve tallied the amount, is how much you can afford to spend on a monthly basis in order to take care of all these things. Based on this amount they will tailor a whole life / term life combo to meet your needs.

So again, how much do you really need?

I guess it just depends on what you want your loved ones to be able to do. I think enough to pay off the mortgage and any other debts as well as provide for a portion of your lost income is reasonable. One good thing about life insurance is that although it is not necessarily cheap, the difference in monthly premium for an additional $500,000 of term life insurance is not that huge.

So how much does it cost?

First of all, I’m going to recommend that you go with 20 or 30 year level premium term life policy. As I explained earlier, term life is the cheaper of the two main types of life insurance, and although your life insurance agent will try to sell you on the benefits of whole life insurance, the best move for you financially is to go with a term policy and to take the money that you would of paid for a comparable whole life policy and to invest it in an IRA or lost cost mutual fund. A typical agent will almost always try to sell you some whole life and for obvious reasons. It costs 5 – 10 times as much as term and therefore they make 5 – 10 times as much money off you. Don’t fall for it! Anyway, the cost of a policy depends on a lot of factors with the two most important ones being your age and health. Your sex also plays a role. Women live slightly longer than men, are less aggressive drives, etc., etc., and therefore are slightly less cheaper to insure in the eyes of an insurance company. For a rough estimate though, a healthy individual between the ages of 25 – 45 should be able to get a $500,000 – $1,000,000 level term policy for less than $100 per month. As I said before, a pure whole life policy will run you approximately 5 – 10 times as much.

Now that you’ve got an idea of how much insurance you need, how do you pick a company? If you have a local insurance agent that you have a good relationship with, I don’t think there is any problem going to see them. Before you go though, have an a figure ready for how much insurance you need and remember to tell them that you are looking for a level term life policy.

Otherwise, I recommend you use a company like SelectQuote which can get you quotes from several different highly rated companies for level premium policies. They won’t try to sell you additional insurance or whole life insurance, and as far as I know they are not compensated by commission. They just act as a middle man connecting you to the insurance companies that offer the best prices. They only use highly rated companies (you’ve probably heard of most of them) so that is another bonus.

Hopefully this post has given you some valuable information you can use when selecting a life insurance policy. If you have any questions, feel free to leave a comment and I’d be happy to talk with you.

Note: A lot of employers offer life insurance to their employees as an employee benefit. While I think this is a good benefit and encourage you to participate because it is usually at a reduced price since it is for an entire group of employees, you need to remember that this life insurance is not portable. If you change jobs or lose your job, this insurance goes away. So if you need life insurance, and most of us do, don’t rely solely on this insurance for all of your life insurance. Go out and get a permanent term policy while you are still young and healthy and while it is still cheap and you’ll never have to worry about it again.

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