This article was sponsored by SelectQuote, but all thoughts and opinions are my own.
Do you have life insurance? Do you need it? What kind do you need?
These are all questions that financial experts are asked on a regular basis. No one wants to think about the bad “what ifs” in life, but no one wants to leave their family financially shattered if something unexpected happens either. So the question you need to ask yourself when deciding if life insurance is right for you is “Do I really need life insurance?”
Do I Really Need Life Insurance?
This is a question I get asked a lot. The short answer is yes. Everyone who is not self-insured should have life insurance – especially if you’ve got a spouse and kids who depend on you. If something unexpected happens your family is going to need stuff, and they’re going to need money to pay for that stuff.
If you’re self-insured you don’t necessarily need life insurance, but before I talk about what it means to be self-insured, let’s talk about the other insurance question financial experts get asked a lot.
Should I Buy Whole Life Insurance or Term Life Insurance?
If you’re not self-insured, getting a life insurance policy is a smart money move. If you’ve decided that a life insurance policy is a smart move for you, the first step you’ll have to take is to begin the fun task of shopping around for rate quotes. Not all insurance companies are the same, so they don’t all charge the same rates. This is why you need to shop around in order to get the best deal on your policy. As you shop for life insurance, one of the first questions you’ll be asked by insurance agents is whether you want whole life insurance or term life insurance.
Whole life insurance policies last throughout your whole life, or up to age ninety-five. Term insurance policies last for a specific term. Personally, I’m a big fan of term life insurance. Term life insurance costs less and generally covers policyholders for a twenty year term, which is long enough to get the kids grown and out of the house and to make a financial plan that allows you to become “self-insured.”
So that’s my first piece of advice: if you’re going to buy life insurance, stick with term life insurance. Whole life insurance isn’t usually the smartest money choice and isn’t usually necessary for most people.
If you decide you need a policy, shopping around for the best price can be a lot of work, so you might want to call a company like SelectQuote that takes your information and does the shopping for you. SelectQuote has been in business for over 30 years and has the expertise in finding the lowest cost life insurance option.
The difference in policy rates can be pretty substantial and you don’t want to spend more than you need to on your policy when you could be putting that extra cash toward wealth building.
Now let’s get back to the subject of being self-insured.
What Does It Mean To Be Self-Insured?
Being self-insured means you’ve got enough money to pay for for final expenses and to support your family financially for the long-term if something unexpected should happen.
Being self-insured generally consists of having reached a couple of different financial goals.
You’re Completely Debt Free
Part of being self-insured is having all debt – including your mortgage – paid off, or at the very least having enough cash in savings and investments so that you can pay off all debt and still have plenty of money to cover your family’s living expenses for one to two decades or more.
You Have Substantial Savings and Investments
The other part of being self-insured is having a large dollar amount in savings and investments. By “large”, I mean enough to cover all basic and potential extra living expenses for at least ten years, preferably twenty to thirty years.
If you’re debt free, this should be a pretty easy number to calculate. Just take your family’s basic living expenses each month, add a ten to twenty percent buffer for unexpected expenses, and times the monthly number by the number of months you want your family to have financial coverage for.
For instance, if your basic monthly living expenses were $2500, and you wanted to have enough cash to cover your family’s expenses for twenty years, you’d take that $2500, add a twenty percent buffer, bringing the number up to $3,000 per month. Times that by twelve (the number of months in a year) bringing the total number to $36,000 per year. Times that number by twenty (for the number of years you want to be insured) and you would need $720,000 in life insurance policies, or $720,000 in savings and investments in order to be self-insured.
That’s a lot of cash, which is why having a sufficient life insurance policy is so important to your family’s security as you work toward becoming self-insured. If you’re close to being self-insured, don’t panic and run out and buy a policy. If you’re goal is $700k but you’ve “only” got $500k in savings and investments with little to no debt, I’m pretty sure your family will be fine even if your income is taken away.
The point is that in order to consider yourself self insured to where you don’t need a life insurance policy to cover expenses, you need to have a pretty substantial amount of cash socked away.
It’s not always fun to check out getting a life insurance policy, but it’s a good product to have in the interim as you work your way toward financial independence.
Do you have a life insurance policy in place? Are you on your way to becoming self-insured?