Life Insurance

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Moving on to the next item on the personal finance checklist, let us take a look at the importance of life insurance.

A friend of mine was living a good life with his wife and two young kids.  One fine day he went to bed and never woke up the following morning. He had had a heart failure and the paramedics couldn’t revive him.  He had passed away in his sleep at home.

He was 49 when he died. This happened about a year ago. I was completely shocked when this happened. His wife works and she now has the responsibility of raising the kids, paying the bills, sending the kids to college, and basically fill his shoes. When a family goes through such a tragedy, the last thing that should weigh the family down is finances.

 

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According to Life Insurance and Marketing Research (LIMRA), “30 percent of Americans know they need more life insurance. That boils down to more than 70 million people. Twenty-five percent wish their spouse or partner would purchase some or more life insurance.”


 

I want to address the need for having a life insurance. I hate to ask but I feel compelled. I want to be honest, genuine, and truthful and ask you this question in the most polite way – If something were to happen to you, and your time to meet your maker has come, “do you have your house in order?” This question is even more important if you are the sole bread winner. Have you taken the steps needed to ensure that the bills will be paid? Here is a quick list of things to think through:

  • How much debt do you have?
  • How much debt you have left on your home?
  • How much did you have in mind to save for your kids to go to college?
  • How much cash reserves do you have for your family’s immediate needs?

 

You might say that – “Well, I have life insurance through my employer.” That is a great start. However, that is not enough. There is always the possibility of getting laid off and you are exposed. Or you might switch employers or start your own business when you are older and you might not be able to get s low rate. It is a good practice to have a life insurance policy outside of work. Life insurance policies come in two forms:

 

Permanent Life Insurance

  • This is referred to also as whole life insurance. Basically, if you die, the beneficiary gets the face value (for example, if you are insured for $1M, the beneficiary would receive $1M), and in addition the cash value (a portion of your premiums get saved into savings / investments).
  • It comes in many flavors – Whole Life, Universal Life, Variable Life, Variable Universal life etc.

 

Term Life Insurance

  • As the name implies, the coverage is for a fixed amount (the amount you chose) for a fixed period of time – 10 years, 20 years, or whatever term you selected.
  • This is the low cost option, fits within the scope of this post, and I recommend it.

 

How much life insurance should I have?

Now you say, “Okay, I get it, I get it, you are making me think too much and my head hurts. How much should I have?” I am glad you asked.

According to The Wall Street Journal’s Guide to Starting Your Financial Life, “Experts recommend between five and twenty times the annual support you provide. Ten times that amount should be sufficient.” If you are looking for a rule of thumb, the magic number is 10 times your current annual pay, especially if you have young kids or parents / family dependent on you.

 

Life Insurance Needs Calculator

While the rule of thumb is a good starting point, the best route in determining how much life insurance you need is by doing a needs analysis. You can answer a few questions at this bankrate.com’s needs analysis calculator or JeanChatzky’s calculator and it will provide you an estimate of how much life insurance you need.

 

Income Replacement Approach

Here is another approach to calculate how much life insurance is needed.

Here is what I read at Family Money Plan“Talking with our insurance agent we were told that the best way to look at insurance for our age was to replace income. So if you are taking home $20,000 and you can get 5% return on investment, you would insure yourself for $400,000. Really you are insuring against loss of income for your spouse should you pass away. Take your amount of annual expenses and divide by the rate you will be able to get.”

One could always compare the results from income replacement calculation to the results from a complex calculator that takes a lot of personal savings information to determine next steps.

 

A Final Note

It is important and better to get the insurance when you are young and in your 20s or 30s. Companies will do health checks before issuing a policy. Moreover, the premiums cost less when you are young and keep renewing your policy as opposed to starting your policy later in life.

Resources like PolicyGenius help you get term life insurance quotes in less than 5 minutes from twenty five A-rated insurance companies for you to pick and choose from.

The best time to get a term life insurance is now!

 

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