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 “Is life insurance worth it?”
Table of Contents
- Is Life Insurance Necessary?
- How Much Life Insurance Should You Buy
- Why I went with term life insurance
Is Life Insurance Necessary?
This is a question I get asked a lot. The short answer is it depends. 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 one hundred twenty. 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 necessarily 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 Policy Genius that takes your information and does the shopping for you.
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 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. If you have debt, you still should consider buying life insurance.
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.
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 your goal is $700k but you’ve “only” got $500k in savings and investments with little to no debt, your family is likely still in a pretty good financial situation, 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.
How Much Life Insurance Should You Buy
A typical rule of thumb is 10 times your current annual salary. For instance, if you make $50,000 per year, then you should have at least $500,000 in life insurance. However, everyone’s situation is different, so here are some things to consider.
How much debt do you have?
If you have a mortgage, credit card debt, or even a car loan, these things could change how much you need.
Consider this scenario:
- Mortgage: $200,000
- Credit Cards: $10,000
- Car Loans: $30,000
This comes out to $240,000 of debt. So you may want to consider adding your debt total to the 10x rule. So if you make $50,000 then you would want $740,000 in term life insurance ($500,000+$240,000). Make sense?
How many kids do you have?
Kids are great, but they can be expensive. Keep in mind, the idea of life insurance is to provide for future income needs for your spouse and your children.
Here are some things to consider:
- Do you want to pay for them to go to college? Maybe factor in about $40,000 per kid.
- Do you want to pay for their weddings? Perhaps, consider $20,000 per child.
- Do you need to pay for daycare costs if something were to happen to you? This could be a big one, depending on the age of your kid and the area you live in.
Obviously there are many more things to consider when factoring in kids, but this should give you an idea of what future costs to consider when purchasing life insurance. So lets say you have two young kids and you want to pay for all three of these.
So you would want an additional $120,000 plus whatever daycare costs might be. Lets say another $96,000 ($24,000 times 4 years).
This would bring the grand total to $956,000 ($740,000+$120,000+$96,000).
My Personal Experience with Insurance
For the longest time, I hated paying for insurance. It seemed like a waste of money. You pay a company a monthly fee just in case something were to happen. And life insurance, do I really need it?
I remember when I got in my first car accident. I was delivering pizzas in college and a car in front of me decided to make a left turn immediately after passing through a green light. It wouldn’t have been as big of a deal, but the guy did not pull all the way into the center lane. This left the right rear of his bumper still in my lane.
I thought about moving over one lane, but there was a car on the other side of me so I couldn’t. I ended up clipping his bumper and doing everything I could to not hit another car.
At that moment, I was flooded with emotions of fear and anxiety.
I was just a college student, how I was I going to pay for the repairs?
I had never had $1,000 in a bank account and even paying for things in college was a struggle; that is why I was delivering pizzas in the first place.
Between the two cars, the cost was thousands of dollars.
Well, thankfully I had car insurance, so they paid the guy directly for his damages. I decided not to get my car fixed because I still had a thousand dollar deductible.
Why do I tell you this?
Because if I did not have insurance, I would have had to pay everything out of pocket with money I did not have. This is why insurance is so important. The whole point of insurance is to transfer risk from you to someone else in the case unexpected events happen. Whether it be a minor car accident or a tragic accident that changes the course of your life forever.
This is where life insurance comes in
When I got married, I realized that I was now responsible for not just me but my wife as well. I want to make sure that she is taken care of which includes her financial well-being. Then fast forward some years, we now have a newborn baby girl and a two-year-old boy. So not only am I worried about my wife but now my two kids as well.
If something happened to me, I asked myself:
‘Would my wife have to work three jobs just to keep things afloat?’
‘Would my kids be able to go to college without being saddled with student loan debt?’
‘Would they be able to live in an area where the schools are good and get a quality education?’
‘Would they have to downsize from a house to an apartment?
‘If so would they have to get rid of the dogs?’
‘Who is going to raise my kids if my wife is working three jobs’
Have you ever asked yourself these questions? Or maybe similar questions about how your family would be affected if something were to happen to you?
These questions were enough to motivate me to find out how to protect my family if anything were to happen to me. When I started to do my research, I found that there are two main types of life insurance: term and whole. I found that whole life insurance is high in fees and is more of a permanent product where term life insurance is very low-cost and for a selected period of time.
Why I went with term life insurance
My goal is to become self-insured where I have enough money to take care of my family without needing life insurance. However, that will not happen overnight. We have a mortgage that we plan to pay off in the next five years and we do not have much in terms of investments at this time, so we need a short term solution. And by short, I mean twenty years.
There are many companies that provide term life insurance and I found the best way to get a quote is through using a tool called Policy Genius. They don’t sell life insurance themselves, however, they will get you real-time competitive quotes from several life insurance companies, some you already know and some you probably never heard of.
Literally, within 2 minutes you can get a quote like I just got below:
This is for A $500,000 life insurance policy for twenty years for less than $25 per month. Most people spend that eating out just one time per week!
Why do we pay to insure things like our homes, cars, heck even airline tickets or shipping things in the mail? But we don’t put a priority on protecting the things that matter most.
When I think about the importance of protecting my family, this is a small price to pay to have peace of mind that they will be covered if anything were to happen to me.
Is your family covered in case something were to happen to you? If not, don’t put this on your to-do list for next week. Click here and take two minutes to protect your family TODAY.
Do you have term life insurance? If not, have you ever considered getting it? Let me know in the comments below!
Note: Every persons’ situation is unique, so you should consider talking with a licensed professional when making serious financial decisions. Also, it is worth noting that getting a quote will take around 2 minutes but the process to get life insurance will be longer than that. Each company will have its own process when it comes to issuing the actual life insurance policy.
Do you have a life insurance policy in place? Are you on your way to becoming self-insured?