Life Insurance….I don’t need Life Insurance…Do I?

Photo by David Hilowitz

Life Insurance, we hate talking about life insurance.  The only subject we like talking about less is the dreaded Last Will and Testament (We’ll talk about that in a later post).  However, life insurance is a bit part of a good financial plan. I’ll try to make this as quick, painless, and informative as I can.

The 3 main questions concerning life insurance are.

  1. Do I need life insurance?
  2. What type of life insurance should I get?
  3. How much life insurance should I have?
Do I need life insurance?
The answer to this is a big fat YES!  Everyone needs life insurance.  The main purpose of life insurance is to replace your income.  If you were the sole income producer in a family, let’s say, of 4, how would your family get an income.  Also, let’s not forget those stay and home Mom’s and Dad’s.  They provide as much or more value to the family as the one bringing home the bacon.  If a stay at home Mom were to die the husband would probably have to hire a maid, pay for extra day care or after school care and pay for other services that the stay at home Mom did.  So you will have to replace the value the Mom provides as well.  So yes every one needs life insurance. The loss of a loved one is stressful enough, don’t make it more difficult by making them wonder how they will pay the bills.
What type of life insurance should I get?
Before we go any further I want to make it clear, I am not an insurance agent.  I don’t sell insurance and I have had no formal training on insurance.  This is just my opinion on what is the best type of life insurance.
There are two main types of life insurance.  Term and Whole Life.  Term Life Insurance is set for a specific length of time or term.  For example, a $50,000 10 year term policy means the policy will be in force for 10 years provided that the premiums are paid.  Term insurance comes in various term lengths.  You can get it in 5, 10, 20 year terms.
Whole Life is usually a product where there is some sort of saving account built into the insurance policy. So a portion of your premiums go into the saving portion of the policy.  Let’s say you have a $50,000 policy.  You will also have a saving portion attached to that $50,000 death benefit.  Sounds really good doesn’t it? Well, not so fast.  First of all the premiums for whole life are more expensive.  Also for the first year or two the extra premium you are paying that should be going into the savings portion will most likely be taken by the as “fees”.  So you won’t be building a saving for a year or two.  That’s not the worst part.  If you had been paying into this policy for, say, 10 years and have built up another $15,000 into the savings portion and you pass away you would think that your beneficiary would get the $50,000 plus the $15,000 savings but you would be wrong.  In most cases your beneficiaries would only the the Death Benefit of $50,000.  And where does that $15,000 go?  The insurance company keeps it.  That’s right, your beneficiaries do not get that savings.
In my opinion Term insurance is the best way to get.
How much insurance should I have?
Well, earlier I said that life insurance is to replace your income.  So in order to do that we will need more than one years salary.  Many financial coaches and planners recommended 8-10 times you salary.  I recommend at least 10 times your salary.  Why do I recommend this? For example let’s say your salary is $50,000, I would recommend $500,000 in life insurance.  Your beneficiary could place this into a good growth stock mutual fund making 10%-12% a year.  They can take out $50,000 a year (10%) and not actually draw from  original amount.  I know what your thinking.  “There’s no place you can get 12% on your money”.  There are mutual funds out there that have averaged that for the past 10 years or so you just need to search for them.
I know this is a long post.  There’s a lot packed in to it but there is a lot more that could be said about life insurance.  Much more than I can go into here.  I’ve only covered the basics and I urge you to do as much research as you can and talk with a qualified insurance agent.  A great place on the web to go for research on insurance is Dave Ramsey’s web site.  Click HERE and you will go directly to his information on insurance.I hope you found this informative.