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Do I need Life Insurance?

Probably! The following will help you decide!

What is Life Insurance?

When someone has life insurance in place, and they die, the life insurance provider pays a sum of money to beneficiaries whom the policy owner has named. You might call Life Insurance “Death Insurance” since it really insures against some of the negative consequences of death. But alas, nobody likes the word “death” so we call it life insurance.

How does Life Insurance work?

The owner of a policy pays a premium. The premium might be paid monthly, quarterly, annually, or even all at once. Imagine a hundred people all pay $100/month into a “fund” and all have $100,000 of coverage. After one year, there is $120,000 in the fund. At the one year mark, one of those 100 people dies. The “fund” pays the decedent’s family $100,000.

Of course there are variables. The younger you are, the less likely you are to die so your premium should be lower? Smoke cigarettes and your risk is higher so you’ll pay a higher premium. Healthy weight? Lower premium for the same amount of coverage.

Why get life insurance?

Because your family depends on you not just spiritually and emotionally, but also financially. You can’t provide for their spiritual and emotional needs after you die but you CAN provide for their financial needs.

All insurance works like this: pay a small premium every month (a guaranteed loss because you never get it back) so that you can survive a gigantic loss that may or may not happen in the future. Just like auto insurance, you pay every month but when something bad happens, there’s a safety net to bring things back to as normal as possible.

Who should get life insurance?

Anyone who has other human beings dependent on their income including: a spouse who couldn’t cover the family’s expenses from their income, any minor children, financially dependent parents or other family members.

The most likely person to need-life-insurance-and-not-have-it is a newly married man: “My wife has a good job and she would be fine if I die.” Well, yes that’s true. But you could die while she’s pregnant. Even when you find out she’s pregnant, you’re probably not going to rush out the day you find out to buy life insurance!

How much life insurance should I get?

A short and simple answer is: 25x your annual expenses plus debt minus assets.

The Trinity Study showed that you can safely withdraw 4% annually from your assets if they are invested in US stocks. Divide 4% into 100 and you get 25.

But what if you have $50,000 in student loans and $10,000 in credit card debt? Well, your life insurance better cover that too.

Susan, 27, earns $5,000 per month. Her husband Jim also earns $5,000 per month. They just got married and just paid off all their debt. They rent a house and have no children. They have $10,000 in savings. They tithe 10%, their tax burden is 25% and they save 15%. Their expenses are 50%, or $5,000 per month. Susan’s half is $2,500 per month or $30,000 per year. $30,000 x 25 = $750,000. Susan should get $750,000 of Life Insurance.

But Susan and Jim want children in the next few years. One of them might stay home with kids or they might utilize childcare. If childcare could be $1,000 per month, it would be smart to add $1,000 to the expense calculation.

$2,500 current monthly expenses paid from Susan’s income

$1,000 potential childcare expenses

$3,500 total per month or $42,000 per year

$42,000 x 25 =$1,050,000

Here, I would round down to $1,000,000 because childcare expenses don’t last forever. Trust me, kids eventually grow up. While they actually get more expensive in teenage and college years, you effectively have $300,000 that you can put toward other costs like college.

What’s the difference between Term and Variable and Whole life?

First, understand Term insurance. Term insurance covers you for a term, like one year or 10 years or 30 years. At the end of that term, you no longer have life insurance, or more technically, the premium goes up so high that only a fool or a dying person would pay it.

Whole and Variable life insurance is just term insurance that has an investment aspect added on. The term ends when you reach 100 years of age, effectively covering your “whole life.” By the way, how much do you think $100,000 will buy when you reach 100? Maybe a used car?

Which kind of insurance should I get?

Buy term insurance and invest the cost difference between term insurance and whole insurance. When you get sold whole life insurance by a salesman who is going to get a MUCH higher commission for selling you whole instead of term, you will probably end up buying less insurance that you need.

How long of a term should I get?

My story:

When I first got married in my early 20s, I got a Ten Year Level Term (level means that the premium is the same throughout the whole term. Effectively, you overpay for the insurance in the first few years and underpay the last few years). I knew that my financial and family situation would be very, very different 10 years later. I was saving pretty aggressively and had no consumer debt and we planned to wait a few years before having kids so I got a ten year level term at 20 times my monthly expenses. 

Just six years later, I had two kids, a house, and made sure I wouldn’t have any more kids. My youngest was 2. I got a new 20 year level term policy so that my family was covered until my youngest child was out of college. That’s the policy I have in place today. Now, my wife has a great job and she could cover all the household expenses without me. So, when my life insurance expires, I don’t plan to get any more.

A friend’s story

To illustrate this strategy with a different situation, let me tell you about Anna. Anna was 29 and had baby number two on the way. They might want four kids. She had a great income and earned more than her husband. She definitely planned to keep her kids in day care. Since her income had grown and with baby number two coming, she knew she needed more life insurance. I recommended she get a $2 Million policy for 30 years. She was shocked at first by both the term and the face amount but then she saw why:

Anna earns $90,000 per year (yeah, she’s NOT in ministry) and has total household expenses of about $6,000 a month. $6,000 x 12 = $72,000/year. 

First, let’s address why I recommended a 30 year term. Consider that in 20 years she will have one child in college, possibly two in high school and maybe one in middle school. That’s not the time to have your insurance expire! She wants to not have kids after 35 years old. That’s six more years of childbearing plus add 22 years to get them through college and you have 28 years. She has a solid 30 years of people being dependent on her!

Now, why such a high face amount? $72,000 x 25 = $1,800,000. But wait, you might say, her husband would also earn money if she died! Yes, that’s true. Consider that inflation will erode the true value of her $2 Million policy. In 22 years, when she still has three kids dependent on her and college around the corner, that $2 Million won’t go nearly as far and her income and expenses will be a lot higher. Getting $2 Million for 30 years is more coverage than she needs right now (because of her husband’s income) and but not really more than she needs in years 15-25 of her 30 year term.

How do I get started?

PolicyGenius.com is a great place to get competitive quotes. See Full Disclosure at the top of this article!

I have more questions!

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