>While I was working as a financial advisor for nearly 20 years, the most difficult part of my job was helping families when they had lost a loved one. The most tragic of these circumstances involved the death of a primary wage earner with a surviving spouse and young children. For some, their concerns were how to invest the life insurance proceeds, for others their problems were much more serious. I have encountered dozens of cases where a mother is left with 2, 3, or 4 children and the father has unexpectedly died. No sooner than a few days after the funeral, she has to put the family home up for sale, withdraw their children from the Christian school, and begin to scramble trying to figure how to replace the lost income. No time for grieving, she goes into a survival mode. Yes, friends and relatives will help her as much as they can but this help typically lasts a few weeks maybe a few months and then reality sets in.
1. Do You Need Life Insurance?
My view on the subject of life insurance is that it should be a mechanism used in financial planning to replace lost income resulting from the death of a wage earner. This is usually only appropriate in cases where there are financial dependents involved. So, if you are a single person you probably don’t need life insurance since you are not providing any financial support to anyone. If you are married and you and your spouse each earn enough money to support yourself separately, you do not likely need life insurance. As a married person without children or a financially dependent spouse, you may still choose to purchase some modest amount of life insurance to pay off debts, and cover your funeral expenses, I have no problem with that.
If you do have children, once they are grown you should be able to substantially reduce your coverage. Additionally, there should be a point in time at or before retirement where you do not need much if any life insurance at all. The idea is to maintain life insurance when you are younger (and coverage is affordable) and reduce your coverage to the point where you eliminate it completely once you reach retirement. Once you hit your mid 50’s life insurance will become expensive and by the time you are in your 60’s your premiums will skyrocket. So, save and invest and plan for the day that you completely drop your coverage when your own investment portfolio will provide a financial foundation for anyone financially dependent on you.
2. How Much Life Insurance Do You Need?
Let’s say for this example, that we have a wage earner with $50,000 of annual income. To create $50,000 of income from an investment account, you would likely need $625,000 if the account were to average an annual return of 8% (depending on how much risk you are willing to take and what investments would be employed in your plan). Each person has to work through these numbers to come up with their own personal life insurance figure.
Another, more involved method, would take into consideration paying off debts and then determining what amount of income would be required if the family were debt free. For example, if there is a car loan of $25,000 and a mortgage of $200,000 and credit card debt totaling $10,000, we could pay off all of this with $235,000. In this scenario, if these debts were costing $3,000 in monthly payments we could subtract that from our monthly income needs. So, we might only need $2,000 in monthly income if all of the debts were paid off. The amount we need is $235,000 (to pay off all debts) and then enough to create $2,000 in monthly income ($300,000 using our earnings rate of 8% as we did above).
As you can see this is really not that complicated when you start working through the numbers. Probably the most difficult part for most people is converting the amount of income they will need monthly into a required lump sum amount. This is a very easy calculation. Annual income divided by earnings rate = lump sum required. For example, $24,000 (annual income needed) divided by .08 (8 percent earnings rates) = $300,000 lump sum required.
One other factor, I have addressed in my books is planning for the loss of of a non-working spouse. If you have younger children, you should plan for the need to hire a housekeeper/babysitter to assist you in running the home. Again, decide on amount you would need. For example, $20,000 per year and do the same calculation as above and the total coverage required would be $250,000 to meet this need.
Overall, the biggest mistake people make is not having enough life insurance. Over the years in doing financial consultations I have rarely run across a person that prior to their consultation with me had enough coverage. Remember, that the key to being able to make life insurance affordable is to stick with term life insurance. There are a lot of insurance agents pushing cash value forms of life insurance such as universal life and whole life. These plans offer internal investments and even loan privileges and they are much more expensive. While there may be a place for these more expensive life insurance plans in complex estate planning situations, the average person simply does not need them.
3. Do You Need Mortgage Life Insurance or Other Forms Of Coverage?
Some people are sold expensive life insurance that will pay off their mortgage if they die. Others end up with life insurance connected to an auto loan or even a credit card debt. You don’t need these very expensive forms of “credit” life insurance. Once you determine your overall life insurance needs as outlined above, you are far better off purchasing a single term life insurance policy that will take care of everything. Another type of life insurance that people buy is “final needs” coverage. Typically sold to the elderly, these small policies are very overpriced. If you do not have any money saved that would pay your burial expenses, and you are in your 60’s or 70’s, you may have no option but to buy one of these polices. Ideally, I would avoid these policies if possible. Here is a link to an article I have written on Final Expense Insurance.
4. Where Are The Best Websites To Use To Shop For Term Life Insurance?
Most families with young children can purchase adequate protection for less than $75 per month. As a Christian, I want to really encourage you to stop today and think about what would happen to your family in the event of your death? I certainly think this should be included in your commitment to being a good steward of your finances and a responsible supporter for your family.
Agree or disagree with my advice, click on comments below.
Helping you make the most of God’s money!