If you already have life insurance, that’s wonderful. But do you have the right kind? And even if you do, are you spending too much for it? Very few people know how to buy life insurance the right way. The good news is, there is only one key to unlock big savings (even though most people overlook it and most agents fail to tell you about it.)
Of course you can save a ton of money by purchasing term rather than whole life, but that’s only the start of the savings parade. The big savings comes when you buy the right amount for the right time from the right company as you’ll see. As I said, very few agents ever explain this to consumers and as a result people waste way too much money. After reading this post, you won’t have to worry about that anymore.
Would it be useful to you to speak with an objective advisor to make sure you’ve got the right life insurance coverage at the best price? I have a few free 20 minute review slots that are open each week. Email me and let me know 2 or 3 times that are most convenient for you and we’ll try to connect.
Life insurance is all about income replacement. Yes the death benefit provides a nice lump sum. But the idea is to enable your survivors to invest that plump lump sum so they create the income they’ll need when you are not around.
How Much Term Life Do You Need?
The best way to answer this question is by way of example. Let’s say you earn $75,000 a year and want to buy term coverage to replace your income in case you die prematurely. Using the “4% rule”, you need $1,875,000 of coverage. What is the “4% rule” and how did I derive the $1,875,000?
Remember that if you pass away, your heirs will have to invest the insurance benefits in order to receive income. For our purposes, let’s assume they invest the money in a balanced mutual fund rather than stick it in the bank earning nothing. Let’s further assume that this fund returns, on average 6% over the long-run.
The “4% rule” simple states that if your heirs invest the death benefit in a balanced fund, they can withdraw 4% of the principle over a long period of time, adjust that withdrawal up for inflation, and the odds of running out of money are very low. (Withdrawal rates and investments are a topic of its own and you if you want more information about that just follow the preceding link.)
So if you need to replace $75,000 a year and can earn 4%, divide $75,000 by 4% to find your answer. If you do the math, you’ll see that in this case you need to have $1,875,000 to invest. That’s how much insurance you need right now assuming you have no other assets. (I’ve written more about how to determine how much insurance you need so you can follow that link if you want to read more.)
But this isn’t the end of the story. It’s gets a bit more complicated. But that’s also where you save the big bucks.
You see, your needs change over time. This happens for two reasons:
1. Your income and spending change over time. Generally, as your family’s spending rises, your need for life insurance will increase. That’s because it will take a higher lump sum investment to create the income to cover that increased spending. But there is flip side of this (and it is critical). Once your spending declines, you will need less life insurance. Sweet.
2. As your investments grow, those investments will be able to provide more income. In other words, as your net worth grows, you can “self-insure” to some extent. Since you can create passive income with your investments, your need for life insurance declines. Make sense?
You can apply both these rules to your own situation and save a truck load of money.
I have prepared an example of this to see exactly how this works. Once you see that example, you’ll see how to apply this concept in your own situation.