If you knew exactly when you were going to die it would be very easy to buy the right life insurance. Pick the policy that expires a day after you do. But since nobody knows exactly when their number is going to be called, it’s a little harder to make the right decision. Here’s an email I received recently reflecting how complex the situation can become:
Me and my wife are in the process of getting a new term life insurance policy. I’m trying to decide between a 20 or 30 year term.
We are planning on having our last child (if we decide to have 1 more) in 2016 (we are planners!) so in 20 years the child will be 18 years of age, and in 30 years we plan to be in our first year of retirement.
I have always read once your kids are out of the house you don’t really need term life insurance coverage anymore. However, I just don’t know if at age 50 and 10 years away from retirement I am comfortable with no life insurance.
At the pace we are at right now we should be good, but you never know what can happen by then I guess. We are good savers now but can we self-insure in only 20 years? I guess I could always drop the 30 year policy after 20 years but I have to get past my frugal mindset when looking at how much I would be saving if I went for the 20 year policy over the 30 year!
Of course it’s impossible for me to tell this reader the exact best approach because, like him, I can’t read the future. But here’s what comes up for me when I read this email.
Kudos to this reader for being so seriously about life insurance. He wants to protect his family and term life insurance can be a good tool to get that job done. I love seeing people behave so responsibly.
Having said that, I want to make sure he has the right amount of coverage and I want to know how he determined the appropriate amount. There is no question about it, having the right amount is at least as important as having it for the appropriate number of years.
2. Get Rid Of Some Unknowns
These people really are planners. They are talking about having more kids and they already have a savings plan in plan in place. That’s sweet. But they need to run a financial plan if they want to know if they can self-insure or not down the road. Even if they do run a plan, there are no guarantees.
The writer has identified a number of very important variables; children, cost of living and investment returns. We can run all kinds of projections and that will wring out some of the unknowns and reduce some of the risk. But there is always some risk because nobody knows what the future holds with certainty.
3. Accept Other Unknowns
People who are good planners tend to be conservative because they want to be prepared. That being said, I would suggest that this couple do three things:
a. Run a financial plan to help determine (among other things) how much they insurance they need and for how long.
b. Be conservative and buy a little more than they need for a little longer than they need it.
Financial planning is great but it isn’t all science. It’s important to take a non-emotional look at what the future likely holds but then approach things a little pessimistically. This is my approach when it comes to life insurance at least.
That being the case, I’d suggest this couple go for the 30 year policy. What would you suggest? Why?