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.

Remember being young and coming across something that didn’t belong to you, yet piqued your interest, and showed some promise of being beneficial. The phrase we used to claim the ‘found’ item was, “Finders Keepers, Losers Weepers”. Basically we found it, so we are going to keep it, and the person that lost it, is well, just out of luck. In today’s ever changing financial climate, we can all find a few things that belong to us, that could be very beneficial.

I came across an article at Kiplinger.com called Resolved: This Year, I’ll Keep More Cash. It is an interesting article that lists seven ways to find and keep more of your cash this year. The one thing that we should all strive for is personal responsibility. In case you haven’t realized, the government is not going to be the answer to your problems. You are the best answer to your own problems. If you need more income, go get a second job. If you need to cut expenses, sacrifice cable for a few months. Whatever it takes to help you and your family win financially, is almost always possible within your own situation. I know there are certain situations that are out of your control, but once we understand the hand we have been dealt, let’s take control and fix the problem.

Ok, rant off. Let’s take a look at the list:

1. Get your spending under control
2. Set up a flexible spending account
3. File a new Form W-4
4. Raise your insurance deductibles
5. Cut the cost of credit
6. Open an online savings account
7. Bump up your 401(k) contributions

What do I think? Thanks for asking.

1. Totally agree with this one. Kiplinger recommends Mint.com for your budgeting. I don’t recommend one method or site over another, when you find something that works for you, use it. I personally use an Excel spreadsheet tailored to our family
2. Haven’t tried this one, but with all of the copays to the doctor and dentist, I will likely be looking into it.
3. Last year we got back the smallest return ever, so this one is one we feel good about. If you are expecting a big return, then change your W-4 and bring more money home in your paycheck each month.
4. Once you have enough money saved to cover the amount of a higher deductible, then talk to your agent about raising it. This will save you on premiums, but don’t do it unless you can afford to cover the deductible out of pocket; not on a credit card. Remember, no more debt.
5. Ok, you know what I am going to say. Instead of cutting the cost of credit, just cut out credit. Sure, you may be able to get some cash back, or earn some reward points, but for us we try to live by Proverbs 22:7
6. I have my emergency fund in a Money Market, but I am not getting anywhere close to 3%, thanks to the Fed rate cuts. I may have to look into this one.
7. We contribute to our 401(k) up to the match, we are fully funding our Roth IRAs and saving for college with 529s. We are going to increase the amount going into college, and may increase 401(k) giving. Afterall, everything is on sale, but we won’t jeopardize our monthly budget. We will do everything ‘on purpose’.

What about you? Any ideas on ‘finding’ some of your own cash?