If you were to walk out your front door and get hit by a bus and you were killed, what would your family do? Would they have financial relief? How much? Would they be able to pay for your funeral? Would your spouse have enough income to support themselves or the kids? Just how much life insurance do you think you need?
I can't stress enough how important life insurance is. Yet, it's often overlooked more often than any other aspect of someone's personal financial plan. Life insurance should be at the forefront of your financial discussions and decisions. It should also be reviewed often to make sure the amount and type you have is still adequate and appropriate for you and your family.
I know a lot of you readers are out there thinking it's expensive and think you don't need it. WRONG. Here are a list of reasons why you need life insurance and I think you will find that you fall under at least one of these reasons:
You're married - Think about your spouse. They will already be going through a huge amount of grief. Do you want that grief to multiply when they suddenly have to worry about money?
You're single - Yes even single people need life insurance. Besides, when you're young and single, that is the best time to get it since it will be so cheap.
You own a business - Way to often, people do not have a plan in place if they pass away. This is how people end up being partners with someone they never wanted to be partners with or the business now becomes the responsibility of someone who has no idea what they are doing.
You have debt - Don't just assume that your debt will go away when you pass away. Likely one of your family members will bear the burden when you're gone.
You own a home - Same as reason number 4. Do you want your spouse to worry about paying the mortgage when you're gone?
You have children - We know that raising children is expensive. Imagine doing it on one income. Could your spouse bear that? The average cost of raising a child is $245,000 and that's before college.
You want to contribute to charity - Life insurance is a great way to leave money behind for the causes you care about.
You want to help your family out - Imagine helping a family member become debt free. This would be a great option to help them.
You're funeral will be expensive - The average funeral is over $12,000. Don't force your grieving family to pay for this out of pocket. I've seen way to many examples where a family had no way to pay for a proper funeral and burial because the cost was just too much for them to take on.
You're a responsible person - Everyone needs life insurance, end of story. Be responsible and take care of the ones around you.
You're a key person at a business organization - Think about your business or employer. If you are a key part of an organization, how would it continue on?
You're young and can lock it in cheap. Life insurance will never be cheaper to you than it is right now. You're only getting older. You can lock in your rates and your insurability now. Take advantage of that or you will regret it later on.
Watch this amazing video about the Draughn family from Life Happens and how life insurance stepped in and helped them during a time of tragedy.
What Kind of Life Insurance Policies Are Available?
Term Life Insurance
Term life insurance is my favorite kind of life insurance. Term insurance is just like it sounds. It covers a certain period of time. Usually the next 10, 15, 20, or 30 years and then it expires at the end of the term. The policy doesn't have any extra frills and does not build up a cash value over time. It simply pays a certain amount to your beneficiaries if you die within the term period. It's also the most inexpensive form of life insurance. I personally, at 26 years old, have a 30 year term policy. For me, I believe this is totally efficient to meet my needs. I personally believe that if you are a responsible and frugal investor, then a term policy will be all you need. Also, when I get near the end of my 30 years, I can convert the term policy into another type of policy or another term policy and I will be evaluated based on the same health class I was in 30 years prior!
Whole Life Insurance
Whole life insurance provides life insurance for the entirety of your life and it guarantees a flat monthly premium that will not change. It also builds "cash value" over the life of the policy that can be used later in life for large expenses, such as college tuition. This type of insurance also guarantees the rate of return. That sounds nice, but see my disclaimer below. They can guarantee the rate of return because it's a very low rate of return. This is an expensive type of policy.
Universal Life Insurance
Universal life insurance also provides insurance for the entirety of your life, but this type of policy promises a certain death benefit. This policy won't build cash value, so it's a little cheaper than whole life insurance, but still expensive. A nice feature of these type of policies is you can choose the age in which you want the death benefit guaranteed to. So, you might choose 85, 90, 100, or some other age depending on your situation.
Indexed Universal Life Insurance
This type of life insurance policy takes the cash portion of the policy and links it to a stock market index. This sounds great as it gives you a chance at higher returns, but your gains are determined by a formula outline in the policy and usually the high fees associated with this will eat into your returns. Your gains are usually limited by the formula as well.
Variable Life Insurance
Variable life insurance policies also build cash value and are tied to some sort of investment. These type of policies require hands on management and come with high fees and administrative charges. Variable policies give you choices in your premium payments and death benefits, subject to certain limitations.
My Personal Disclaimer - I tend to agree with Dave Ramsey on this topic. I am NOT a fan of any type of life insurance other than Term Life Insurance. That is saying something considering I'm licensed to sell life insurance. Sure, there are some scenarios where the other types of policies make sense, but if you're a long term disciplined investor then term life insurance should be all you need. I do not believe people should be investing within their life insurance policies. The fees are outrageous and the returns are dismal compared to the returns you can achieve investing on your own.
“Life insurance is a must. It is not a luxury.”
Calculating how much you need
I'm going to show you guys an awesome tool today created by Erie Insurance. We'll go step by step together to determine just how much you need based on your individual needs.
Step 1. Go to www.erieinsurance.com
Step 2. Once you're there, hover over the "Insurance" tab at the top of your screen. Then click on "Life Insurance"
Step 3. Scroll half way down the page to the "Calculate Your Needs" section of the screen. Then click on "Get Started"
Step 4. Secret Tip: To skip steps 1 through 3, just click this link to be taken right to the tool.
Step 5. How Old Are You?
Step 6. Do you have a spouse or partner?
Step 7. Do you have any children?
Step 8. How much would you need for final expenses?
This is a question that will likely be different for everyone. This would be the amount you need to cover funeral costs and/or medical expenses that are not covered by health insurance. Erie Insurance offers a helpful tip here and suggests that $15,000 is an average. Punch in the amount you need and click next.
Step 9. What is your personal annual income?
Think about your working wages and any side hustles/businesses you may own. Add everything up and put it in this section.
Step 10. Do you have a mortgage?
Chances are, if you own the place you are living in you probably have a mortgage. Click on yes or no and then click next.
Step 11. How much do you owe on your mortgage?
Find out how much you still owe on your home and insert that balance here.
Step 12. Do you have any student loans?
Step 13. Do you have other debt?
Think car loans, business loans, credit card debt, etc...
Step 14. How much would your family need for monthly expenses?
This is often an overlooked question. If you're married, or even single for that matter, you have to consider the affect your lost income will have on your family when you're gone. Just think about your monthly expenses right now. Who would pay these when you're gone?
Step 15. Do you want to contribute to anyone else's education?
Come on be nice!
Step 16. Would you like to leave an inheritance or charitable gift?
Step 17. How much do you already have in life insurance?
It's not uncommon to have some life insurance through work. But be careful! Most of the time, you cannot take that insurance with you when you leave the company. Also, it's usually not enough to begin with. Usually through work, the amount of life insurance you have is some multiple of your annual income. Sometimes this is 1 times, 2 times, or 3 times your annual income. So if you are making $50,000 per year and you have 2 times your income at work then you have $100,000 of life insurance.
Step 18. Do you have other assets that could be used to cover expenses?
Think savings accounts, stocks, bonds, CD's, retirement funds, real estate, etc...
Step 19. The Result!
Whatever number you see here is the amount of life insurance you still need on top of what you already have. Are you surprised? As you can see in the picture example below this paragraph that this individual still needs an additional $231,000 in life insurance.
What Now?
It's time you have a serious conversation with your insurance agent. Print your results and take this to your agent (they will be really impressed). They will guide you through the quote process and help you get what you need. They will help you decide whether you need term, whole life, or universal life insurance.
Fun Facts About Life Insurance:
It costs $245,000 on average to raise a child and that doesn't even include college. - Erie Insurance
It costs $7,000 for a modest funeral on average. I've even heard of this being much higher at 14-15 thousand dollars. - Erie Insurance
It can cost only $14.24 per month for $250,000 in life insurance. - Erie Insurance
Want to work with me on your life insurance?
I'm a licensed agent in the state of NY & PA, however I only sell life insurance in the state of PA, right now. So, if you're reading this and you live in the state of PA, I would love to help you with your life insurance.
Contact Me at nick@coinstackfinancial.com
Visit my employers website at www.teamrossbacher.com
Still want to learn more about life insurance?
Check out this list I compiled of great life insurance resources:
LifeHappens.org
Thanks everyone for reading. If you liked this article, please connect with me on all the social media platforms and share this article with your friends. As always, please don't hesitate to reach out and get a discussion going below in the comments. Until next time, I'm Nick with Coin Stack Financial, cashin' out!