Life is fragile; we all know that. But we get so entangled into our day to day living that we procrastinate and forget to do the most fundamental thing we should do to protect our families.
And that is to insure our lives.
It’ll cost some money, but it is the best money you’ll ever spend.
And it is an expense. All insurance is an expense. Just like you don’t expect to make money insuring your car or your home or your health, you shouldn’t expect to make money insuring your life.
Unfortunately though, the life insurance policies that are heavily marketed and sold always have an investment component mixed in.
But unless you hate yourself and your money, run anytime anyone pitches you a product that combines life insurance and investment. Because you’ll be taken to the cleaners like you never showered all your life.
Life insurance fundamentally is insuring your income against an income-stopping calamity. With that in mind, what kind of life insurance should you buy? But before that, who does not need life insurance because not everyone does. Some pointers…
- A two-income family with no dependents likely does not need life insurance but I’d still buy one if the arrival of dependents is on the horizon.
- Single people with no one depending on their income do not need life insurance. That includes kids. I mean people are insuring their kids’ lives? There is no Macaulay Culkin you got there yet who earns so much that his income matters. So don’t do that.
Who needs life insurance?
- A one-income family with or without dependents. If no dependents, insuring the life of the income-earner is of course super important. If with dependents, you would likely want to insure both parents’ lives. You’d need some support structure if your non-earning spouse unexpectedly dies.
- A two-income family with dependents in almost all situations should insure both incomes.
- A two-income family with no dependents but with large debt obligations. If both incomes are needed to support your cost structure, you’d naturally want to insure both lives.
How much life insurance to buy?
I would start with 10 times your annual income at the minimum and move up from there. Same amount for your spouse if applicable. At some point on that income scale, you’d want to switch from insuring against an income loss to insuring your current and future living expenses.
What I mean to say is that if you make $100,000 a year, you should aim for a million dollars in life insurance as a baseline. But if you make say $500,000 a year and can sustain a decent life on $100,000 a year, then you’ll want to use $2 million in life insurance amount as a baseline. That should cover about 20 years of expenses in case something happens to you or your partner.
So, if you make normal income, you’d want 10 times that as a baseline life insurance amount. But if you are making bank and can live on a fraction of that, you’d use 20 times your living expenses as a baseline life insurance amount.
Just enough insurance and not a dollar more.
What kind should you buy?
A 20-year, level-term policy is an ideal kind. Twenty years is about the time it’ll take you to right your ship financially to get to a point where you won’t need to protect your income much. Twenty years is also about the time needed for your dependents to graduate college and be on their own.
You can probably stretch that duration of income protection to 30 years but none beyond that.
Insuring your whole life is never worth it because insurance companies are not in the business of losing money. They know death is certain. They’ll design their policies to recoup their cost plus a big slice of profits…from you.
And insurance businesses are some of the most profitable businesses around. Don’t make them even more profitable on your dime.
Level-term means that the premiums remain the same for the entire duration of the policy.
How much should it roughly cost?
A $1 million, 20-year level-term policy for someone in his 30’s with no pre-existing health conditions should cost around $50 each month. That is dirt cheap.
Of course, the older you get, the more you will pay but it’ll still cost you a fraction of the other junky policies you are likely to get sold.
How to buy?
I’ve used SelectQuote, an insurance marketplace and there are others you can use but where you price shop is less important. What is more important is the insurance provider you pick.
You’ll fill out a questionnaire at one of these marketplaces and they’ll send you a list of options to choose from. Pick the one that is rated A or better by A.M. Best, an insurance rating company. Just type the name of the insurance provider along with A.M. Best rating in the Google search bar and you’ll know their grade.
And it is a grade. Your insurance contract is only worth the paper it’s written on if the business behind it will be around to honor that contract. Insurance businesses rarely fail so you shouldn’t worry too much but why take a chance.
Every situation is different so talking to someone in the know might be warranted but if you are talking stocks and you’ve got a family to support and you don’t got life insurance, a big, big shame on you. Get on it today because your life can end but your family’s life will alter for far worse overnight.
Thank you for your time.
Cover image credit – Willsantt, Pexels