Let’s talk life insurance
One of the most important decisions that needs to be made when evaluating your financial plan is the amount and types of insurance you currently have and how much more you need. At a minimum you absolutely must have health, disability and life insurance. Most states require auto insurance so we will classify that one as a no-brainer and take it off of your list of choices.
Of the big three, most people are under insured in disability and life insurance. Of these two, life insurance is the one that has the greatest impact on your families financial future, so I wanted to breakdown some of the important aspects of the different types of life insurance. First, let’s talk about the benefit of life insurance.
The Benefit of Life Insurance
Let’s face it. Life insurance is poorly named. You don’t benefit from life insurance as long as you are alive, you only benefit once you die, and even then it isn’t you who benefits, it is your family or beneficiary. Life insurance is really death insurance, but not having it can wreck the financial plan of your family. When you die your spouse is not responsible to pay your debts unless both of your names are tied to the debt. For example, if you have a car, and only your name is on the car, your spouse is not responsible for the debt if you die. However, your estate is responsible. This means that although the finance company can’t make your spouse pay off your car, they can make him/her pay for the car out of any equity within your estate. If you have no life insurance, that could mean that the car would be sold and your half of the savings account be taken to repay the debt. Not the type of situation you want to deal with in the midst of the stress of losing a loved one. If you have life insurance, the debt is simply paid for with the proceeds of the life insurance.
Different Types of Life Insurance
The majority of the life insurance policies sold in the United States are some sort of whole life insurance. There are several types of whole life policies but the one thing they all share is that you are covered for your entire life. Another commonality is they are pretty expensive. Almost all whole life policies have a “forced savings account” feature. Part of the cost of the premium, goes into savings. This savings builds up and is considered the “cash value” part of the policy. If you decide to cancel the policy, you will get all or part of the “cash value”. This sounds like a really good idea, but the rate of savings is generally very bad. The other down side to the whole life policy is if you die, you only get the face value of the policy, and the insurance company keeps the savings.
The second type of life insurance is term life. Like whole life there are a variety of term life policies. Unlike whole life, term life insurance is relatively inexpensive and the policy is purchased for a specific length of time. For example, you could buy a 20 or 30 year term life insurance policy, and at the end of the term you are uninsured. Some people think this is a ridiculous idea, after all, shouldn’t you carry life insurance as long as you are alive? Not necessarily. If you are completely out of debt, you have a good emergency fund in place, your kids are out of college and your nest egg is ready for retirement, your income in case you die, is not required for your spouse to survive. To continue to carry insurance when you don’t need it is not very smart, especially when that money could be used for something else.
The Right Type of Life Insurance for You
Which type is right for you? That depends. I recommend term life, for two main reasons. First, term life will almost always be a lot cheaper, which means you can get more coverage, and if you invest the difference in some good mutual or index funds, you will be able to create a substantial sum of money over the term of the policy. The second reason I recommend term life insurance is because like I have already stated you don’t need life insurance for your entire life. Once you can cover any situation that would arise in the case of your death, you are now self-insured. Instead of paying an insurance company a premium, pay yourself and you will end up with a better rate of return, and you will have control of your future.
We recommend you take out a 20-30 year level term policy that is 10 times your current salary. In the case of your death, your family will be able to invest the money and the interest produced will generally replace your income. If you have a whole life insurance policy, and you decide you want to switch over to a term policy, you should keep the whole life policy in place until you secure the term policy. If for some reason you are uninsurable, due to a medical condition or your age, and you have a whole life policy then keep it until you have all of your debt paid off and your emergency fund is in place.
Don’t jeopardize your family by not having life insurance. Term policies are very inexpensive and can protect your family at the very time they will be missing you the most.
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