Financial Planning Should Include Life Insurance
Every Financial Plan Should Include Life Insurance
Every financial plan of any kind should include life insurance.
Life insurance should be a part of everyone’s financial plan regardless of age, occupation or marital status.
Many people are turned off by discussions about life insurance because it revolves around someone’s death.
But the reality is, everyone who is born is eventually going to die.
It is a fact of life.
No one WANTS to talk about death but the conversation needs to be had in order for proper precautions to be put in place.
As we know death can come at any time.
As unpleasant as this fact may be, it is true.
Everyday we hear about people of all ages dying.
Children, middle-aged adults and senior citizens leave this world everyday.
It is a wise person who prepares for events that are certain to occur.
The old saying that states that “death and taxes” are two things that are certain in this world is true.
As much as we don’t want to think or talk about it, one day it will come.
And we need to be ready for it.
Who Needs It?
Who needs life insurance?
The simple answer to that question is: everyone.
That may sound like a strange answer but the truth is everyone who is living is at risk of dying.
Tragically infants die everyday.
From complications at birth to Sudden Infant Syndrome (SIDS), the causes of infant death are varied but real.
As unthinkable and disheartening as infant death may be, it happens.
And, God forbid, if it happens in your family there should be a life insurance policy in place to take care of any and all expenses related to the infant’s passing.
The simple truth is everyone in a family should be covered by a life insurance policy.
This may sound morbid and overreaching but the reality is that if a premature death were to occur in your family, you would want to have life insurance to cover funeral costs and any medical bills that may be associated with the death.
Too many times families find themselves caught off guard when a death occurs in the family that they didn’t expect.
Often we see or hear on the news about a family trying to raise money to take care of burial expenses related to the death of someone who passed away unexpectedly within their family circle.
This is a situation that can be embarrassing and inconvenient to deal with.
A simple $5,000 to $10,000 insurance policy which can be purchased very cheaply would cover the average funeral cost and relieve the headache of trying to collect money to pay for a funeral at the same time you are grieving the loss of a loved one.
So the answer to the question above is: everyone should be covered by a life insurance policy no matter what age or health condition.
It’s the safe and smart thing to do.
How Much Is Enough?
The second question you may have is how much coverage should I buy?
The answer to that questions lies in the answer to the question: What are you trying to take care of?
If you are simply trying to have enough money to cover the cost of a funeral and medical bills as in the situation above, a simple low coverage policy will do but if you desire to take care of additional expense you will need a policy that has considerably more coverage in it.
Any working adult should have life insurance coverage.
Most jobs offer basic life insurance coverage to it’s employees.
For a very low premium an employee can buy a $50,000 or $100,000 life insurance policy through their employer.
Businesses can usually offer lower than retail market rates because they are part of a group plan that has thousands or even millions of other policyholders.
The large number of policyholders gives the insurance provider the freedom to offer very low premium rates that translates into savings for you, the employee.
Generally, employers put a limit on the amount of insurance coverage an employee can purchase in that; any insurance purchased through an employer should be purchased as supplemental insurance.
The main insurance for an employee should be purchased through a personal insurance policy outside of work.
In the case of a working adult with a family, the amount of insurance coverage needed will depend on several factors and calculations.
If the adult is the head of household any life insurance coverage should be looked at as replacement income for the loss of the primary income provider.
So any calculation to determine how much insurance to purchase has to revolve around the salary of the main income provider and how many years of lost income are attempting to be compensated for.
For instance if a worker is making $40,000 per year and they are trying to provide for lost income of 10 years, then the minimum life insurance policy amount purchased should be $400,000.
In essence a life insurance benefit (paid out amount of a policy) is replacement income for a worker who is no longer there to provide for the family.
An insurance pay out should never be looked at as extra income.
It is replacement income to be used just as the income of the worker was used:
To pay living expenses such as utilities, mortgages, other insurances, food costs, car notes, etc.
Because life insurance policies are usually paid out in a lump sum the tendency of some beneficiaries is to treat the payment like a lottery winning.
This is not the intent or the purpose that life insurance is to serve.
It is to provide for living needs of loved ones who are left behind when the head of household passes away.
Although compensating for the lost income of the head of household should cover most of the living expenses that were being taken care of by that income there are additional costs that are not covered that should be considered in the calculation of how much life insurance to purchase.
If there are children in the household providing for their college education should be considered in your calculation of how much life insurance to purchase.
A unique quality of life insurance is that it can sometimes provide for things that you cannot provide for as a wage earner.
The benefit of a lump sum pay out of a life insurance policy is that it can cover a big-ticket item like college tuition very easily if you have a large enough pay out.
Whereas a wage earner would have to work a long time to accumulate enough money to send a child to college a significant life insurance policy with it’s ability to combine several years of income together at one time, can accomplish the task quite effortlessly.
Many life insurance policyholders use their policy as a possible means to provide for their children’s college education in the event of their early death.
Although no parent or guardian plans to die before their children reach college age, making a provision for them in your life insurance policy is a financially responsible thing to do.
Standard of living Is another consideration in the calculation of how much life insurance to buy.
A policyholder wants to provide enough replacement income through their policy to maintain the standard of living that their family has grown accustom to.
Again, although the replacement of salary should cover most things that would encompass the standard of living, there may be a few items that are not.
What those items are will vary from family to family but they should receive consideration when calculating life insurance amounts.
When trying to determine the amount of life insurance to purchase you must be careful to not go overboard trying to compensate for frivolous things or provide for things that you normally would never try to get if you were working.
Trying to provide money for a yacht or some other extravagance should be avoided.
As mentioned before, life insurance should not be treated like it is the lottery.
It is in place to provide for the needs of a wage earner’s family in the unfortunate event of their premature passing.
What Type Of Insurance Should I Buy?
There are literally hundreds of life insurance policy types available to the public with a myriad of clauses and other financial products attached to them.
With so many kinds of insurance and so many variations on coverage, buying insurance can leave your head swimming.
Understand one thing, insurance agents will sell you anything that you are willing to pay for and many unscrupulous agents will purposely sell you more coverage than you need and a policy that does not suit your needs.
So you need to be informed as to what type of insurance is best for you.
The key to this conversation is the word insurance.
That might sound weird but it won’t after I explain.
When you go out to purchase life insurance that is exactly what you ought to buy.
There are many life insurance companies that have all kinds of variable life insurance products that have investment vehicles attached to the policy but trust me, you don’t want that kind of policy.
You want pure life insurance.
Plain and simple.
Any life insurance policy should have one and only one purpose:
To provide compensation in the event of the death of the covered individual.
That is the sole purpose of life insurance.
Although many life insurance companies offer variations on this concept it still remains, the only objective of a life insurance policy is to provide monetary compensation for the death of the insured.
For that reason term life insurance is the ONLY type of life insurance that you should purchase.
Term insurance is exactly what it says it is.
It is life insurance for a determined length of time whose premium is charged at a flat rate.
Term insurance makes buying life insurance simple.
Because you are buying pure insurance you know exactly what you are getting and exactly how much it costs.
With other life insurance products like whole life, variable life and universal life you have investment vehicles attached to the policy which makes it hard to determine how much of your premium is going to insurance and how much is going to investments.
In other words, you have no idea how much your actual insurance costs.
What you do know is that you are paying an inflated premium to cover the cost of the actual life insurance along with the investment.
In addition, most of these types of insurance policies have a 2 to 3 year delay until you start to see any interest from your “investment”.
And the interest rates are not much better than the simple interest rate you can get from a savings account at the bank.
In other words, it is a waste of money and time.
With term life insurance you know exactly what you are paying for and exactly what it costs.
When it comes to insurance and investing you want to keep them separate from each other.
Although you may buy insurance for an investment (like a painting or rare furniture piece), you don’t want to buy life insurance with an investment vehicle attached.
Even in the example mentioned here the investment and the insurance for it are purchased separately and the same should be done in the case of life insurance.
We can buy televisions with DVD players built into them but that doesn’t mean we should do the same thing with life insurance and investment vehicles.
Keep them separate.
Buying life insurance should not be difficult or confusing and it won’t be if you buy exactly what you need:
As a former life insurance agent with 6 years of experience I felt it incumbent upon me to share my knowledge, experience and wisdom with those who may be contemplating life insurance or who may already possess life insurance.
In today’s economy you need to get as much bang for your buck as you possibly can.
I hope this article has been beneficial to someone who is about to make the decision to purchase life insurance or who has already made the decision.