Life Insurance: Are you hanging your family out to dry?

Imagine for a moment your family without you. Would they be able to pay their bills comfortably, or would they be scrounging around, struggling? I’m asking the question because a common theme I’m starting to see when meeting with clients is how they severely under-value life insurance.

This is not a sales pitch folks. Those of you with a mortgage, spouse, and/or children, or anyone who depends on you financially, I’m speaking to you here– you need life insurance. Period.

I’ve literally had people say to me, ” I won’t need any money if I’m dead and I’m not here to make my spouse rich if I die”

People have said those exact words to me and it’s absolutely ridiculous! Are you serious? This is your family we’re talking about! Your children! Dealing with the death of a family member/spouse is hard enough in and of itself, now imagine the stress of having to deal with financial hardship on top of that.

So, how much to I need then?

That of course depends on several variables, but first let’s take a look at each “factor” in the equation.

Debt and/or Mortgage

Having a mortgage is one of the most common reasons I see people purchase life insurance and the problem is, they tend to base the policy amount on the current mortgage amount, without taking into account interest.

Say you have a $250,000, 30 year fixed mortgage at 3.5%. Your monthly mortgage payment before taxes and insurance would be roughly $1122. Now, multiply that number by 12, and then by 30. Because of interest, you are actually paying over $400,000 for that mortgage.

[quote]If you die, do you think your spouse and/or children could afford to pay $400,000 without your income? I’ll let you answer that question.[/quote]

You also have to take into consideration other debt, like student loans and credit card debt. If someone is left to pay a $400,000 mortgage on their own, how to do you think they’ll fare with this stuff on top of it? Without life insurance, a family’s credit card debt is surely to sky rocket to cover expenses and bills that would typically covered by their previous household income.

Children

If you have children then you know about the added costs that go along with them. Forget about college tuition, (which spiked 8.3% last year while at the same time local funding for operating expenses, research and student aid fell by 9%) let’s just talk about the day-to-day expenses like the additional cost of food, insurance benefits, clothing, and other expenses that always seem to crop up!

Having just one child can significantly impact your income, and if your spouse dies prematurely, will you be able to cover those expenses for the next 10, 20, 30 years?

And don’t think you can rely on your current nest egg. We just went through one of the worst financial “cycles” in the history of our country, and we’re not exactly out of the woods just yet either. Investment earnings dropped to nearly all-time lows!

Can you really expect to rely on your current savings or income with volatile investment markets, and on top of that, inflation? Think again.

Final Expenses

Final expenses can range anywhere from $10-$40,000. Nuff’ said.

What are my options?

There are two main types of life insurance. Whole life (a.k.a. permanent) and Term. Let’s talk really quickly about the differences.

Term Insurance

Term life insurance is most likely going to be your best option to start with, especially if you’re young and counting every penny. Term life is generally very inexpensive, mostly because there are a ton of companies that offer it, so the pricing is very competitive.

Term life insurance’s only objective is to pay your beneficiaries if you die. Period. You can’t invest money into it. You’re sort of “renting” the policy in that it really doesn’t belong to you, but the insurance company. You’re buying it purely for the death benefit.

Term life (and whole life) can be purchased in 5 t0 10 year “terms” hence the name, and if you have a 30 year mortgage, you will probably want to look into a 30 year term policy as a rule of thumb.

Once your term is over though, you have no more insurance unless you decide to convert the term contract to  whole life one at a much higher premium.

Whole Life

Whole life insurance pays out if you die, but can also be used as an investment vehicle as well. In certain types of whole life insurance, like for example variable life insurance, you can accumulate cash value in your policy (because it’s being invested) which can be used for several things like paying premiums or adding on to the death benefit. With whole life, you “own” the contract for life (it doesn’t expire like term insurance), and can do with it what you wish, like for example sell it, or borrow against it’s cash value.

Whole life is generally more expensive than term insurance, and in my opinion, I would rather invest my money in other investment vehicles than a life insurance policy but that’s me. However, it could be beneficial to someone who has some disposable income, and whose portfolio is already well diversified with other investments.

So what should I do? How much do I need?

Listen– get yourself a term life policy and call it a day. You have to qualify medically, but it’s totally worth it. The cost is literally pennies on the dollar. You’d be foolish to get anything less than a $500,000 policy, especially if you have a child!!!

If you have more questions about pricing or companies, drop me a line, or leave a comment below and I’ll help you out or give you some more personal advice, but personally and professionally, I’d recommend $1,000,000 policy to start with.