We all love our families – that’s a given. Usually, everything we do is for them in one way or another. Cook food – yup. Earn money – yup. Go to Disney – yup. Pretty much everything is meant for their benefit, either directly or indirectly. And yet, many of us don’t do the one thing that could prevent their lives from being a living hell in the time when they most need us.
Why? Because it is boring, mundane thing that seems like a useless hassle. I mean, we’re not planning to die. Yes. You read that correctly. This is something that we complete in case we die, in which case, they will be the very last act of love that we can ever do for our kids, or spouse, or whoever we leave behind. And it is indeed boring and a huge hassle. But not nearly as much of a hassle as our family will deal with if we die without it. So let’s take a quick look at the most boring thing you can do to show your family you love them: life insurance
Repeat after me: portable, 10-12 times annual income, guaranteed level term life. OK that’s all you need to know. Next topic.
Portable
Just kidding – kind of. Those three things are literally all you need to know, but you might like a little more detail than that, so here it goes. Your life insurance needs to be portable – in other words, it shouldn’t be tied to your employer. A lot of employers provide some life insurance, and if it’s free, great. But do NOT count on that. There’s a simple reason why.
Let’s say you are seriously ill. Like, sick enough you can’t work anymore and you leave your job. If your only life insurance is through your employer, it is gone, too. “Well, no worries, I’ll just get life insurance someplace else.” But will you? Will you qualify? Will you be able to pay for higher premiums? Or will you be out of luck just when you need life insurance the most?
That is why life insurance needs to be portable. It means more hassle when you get it because you will probably have to get a mini-physical and you’ll have to research it yourself to get the best rate. (Hint: apply with several companies because different insurance companies rate things way differently. Slightly elevated cholesterol numbers might not be a big rate changer with one company, but could jack prices way up with another.)
10-12 times annual income
When buying insurance, you should shoot for 10-12 times your annual income. For example, if you make $50,000/year, you should have between $500,000 and $600,000 in coverage. If you make $150,000/year, you should have between $5 million and $6 million in coverage. It sounds like a lot, doesn’t it? But here is the reason.
You should have enough insurance that you could invest it and the income would replace your income. Usually, 10-12 times your income, if invested well, will do that. That will allow your family to survive without your income, even if your kids are very young. They would never have to worry about the money running out.
Guaranteed level term life insurance
Next up, term life. For people not in the insurance industry or who are not financial geeks like me, (I really get into this stuff!) insurance can seem totally incomprehensible. But there are only two things you really need to know about the type of insurance to buy. First, buy term life insurance. Secondly, your insurance agent is going to give you 500,000 reasons that I’m wrong and you should buy some other kind of insurance. But don’t listen. I’m right. They are making commission. If you are ready to trust me on that, you can quit reading now. If you want a little more information on why I say those things, read on.
Term Life vs. Whole Life
There are basically two types of life insurance – term life and whole life – with some sub-categories. Term life insurance is just that. It is insurance that you buy for a certain period of time, usually a term of 10, 15, 20, or 30 years. If you die during the term, it pays out. If not, it doesn’t.
Whole life is life insurance that never expires (as long as you are paying the premiums) with a savings component built into it. It will cover you your entire life, you can borrow against it, and it actually has a savings component, so that its cash value accumulates. “Hold on just a second, Jill,” you may be saying. “That sounds like a WAY better deal. Why on earth would anyone go with a chintzy term life that expires when whole life offers all these benefits?”
What is insurance for?
And the answer to that question lies in what insurance actually does for us. What is life insurance for? Well, it is to ensure that anyone who is depending on us financially isn’t left in a big mess if we die. Kids, spouse, anyone who needs your income – that’s who life insurance is for. And it’s purpose – its SINGLE, SOLITARY PURPOSE is to provide for dependents.
It is not intended to be a savings account, an investment, or a bank to borrow from. It’s just to make sure that your family isn’t totally screwed if you die. And all those other bells and whistles? What do they hurt? Well, they cost money – a LOT of money. And they don’t do any of those extra things well.
Why your insurance agent desperately wants you to choose whole life
Whole life insurance can cost 10 times what term life does. I don’t know about you, but I’m not eager to pay ten times as much for anything that doesn’t provide a super-benefit. And one of the reasons that it costs so much is related to the second thing you need to know: your insurance agent is going to be convinced you are making a huge mistake if you don’t get whole life or some type of insurance other than guaranteed level term life. One of the reasons it costs so much more is that your insurance agent is going to receive a much, much bigger commission if he sells you that.
Now, I’m not dissing on insurance agents. Most of them have been trained to believe that whole life is really the way to go. Their company has a huge incentive to convince them to sell more expensive policies, but that doesn’t mean they are right. However, because they have been trained to believe it, they are going to give you 500,000 reasons that they are right and I am wrong. So no matter what arguments they throw at you, you just pat them on their little head and buy guaranteed term life. Then take the extra money that you WOULD have spent on whole life, and use it to get your financial life in order. Pay down debt, get that emergency fund in place, and invest the extra. If you do those things, it’s almost guaranteed that you will be better off by buying guaranteed level term life. If you take the extra and go to Disney? Well, then I can’t promise you anything.
But my agent says I will lose all my money if I buy term life and don’t die
Not really. Let’s go back to why we are buying insurance and fill in a little more detail. You buy insurance (of any kind) to transfer the financial risk of losing something from us to another entity. What’s the financial risk if your house burns down? You will have to pay for another house. What is the financial risk that is covered by health insurance? The need to pay medical bills if you are sick. What is the financial risk of dying? Your family will lose the benefits of your labor and the money it might have earned.
So when your agent tells you that you will have wasted your money if you buy term life and don’t die, he is referring to the small amount of cash value you would build up if you had whole life. But remember, you are not paying to build up cash value. You are paying to make sure that whether you die or not, your family is financially protected. If you don’t die, your family is protected – by YOU. Your income, your work, your effort. If you do die, however, your family is protected from financial devastation by the insurance. You got what you paid for either way – a family that is financially safe.
Just do it
So those are the only three things you absolutely have to know before buying life insurance. There are a ton of other boring details that geeks like me just love. If you want to know everything about insurance, you can check out any of these links. This one is great to find out if you actually need insurance. But if not, now you know the basics.
PS Do me a favor. If this post moves you toward getting life insurance, please post below letting me know. It would make me really happy to know you have taken the time to make sure that your family will be OK if anything should ever happen to you. If you don’t know where to start, check out this page of independent insurance agents. I don’t make money from you clicking on this link – now or ever. But being an insurance affiliate is big money, so be careful out there. Some web sites prioritize their profit over your best interests.
Remember, you’ve got this.
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