You may not need life insurance. Plenty of people don’t. But when I meet people who should have life insurance and don’t I go nuts. I also go nuts when people get sold the wrong kind of life insurance. I’ll get to all this. But first, let’s address the question of who should buy life insurance.
Why Buy Insurance?
There are only two good reasons for people to own this coverage. The most important reason to buy this is to protect your family in case you or your spouse dies prematurely. The other reason is to pay estate taxes. (This impacts very few of us so I’m not going to address that issue here.)
Let’s get back to the main purpose of life insurance. If there are other people who depend on you to provide income (that would not exist if you die) you simply must buy life insurance. There is no other way to create an instant asset pool that would replace your income other than life insurance. Life insurance doesn’t replace your income per se. It creates a big pot of money in case you die. Your beneficiaries take that lump sum and invest it for income.
The Reason I Take This Subject Personally
If you are a seasoned reader of Wealth Pilgrim, you know that both my parents died before I finished high school. My father had a small term life insurance policy in place by sheer luck. He didn’t have a plan and he certainly didn’t have enough to provide for 4 orphans. But he did have a policy and my share was enough to put me through college. (That was a very long time ago when it cost almost nothing to go to college. Don’t try this at home.)
I get triggered when I see parents with minor children who don’t have the right insurance and/or who don’t have enough. It just frightens me. That’s why I am a little nutty when it comes to this topic.
What is the right kind of policy to buy?
If you are interested in protecting your family for a specific time period (and you should be) only buy term life insurance. I’ve written extensively about term life insurance vs whole life. Whole life is terrible for family protection. Why?
Because whole life is so darn expensive that people often buy a lot less insurance than they need. It gets sold as an investment (which it is not) and the family goes unprotected. That’s one reason why I can’t stand whole life. And it’s why I get into so many arguments with whole life agents who buy big fancy cars with the whole life commissions they make. But I digress.
What is the right amount of coverage to have?
Once you conclude that you need life insurance, you need to know how much term life insurance you should buy. A good rule of thumb is 15 to 20 times your income. This assumes that your income is great enough to pay your bills and put aside a sufficient amount for retirement savings.
When should I buy the term insurance? How long should I own it?
If people depend on your income right now then you need life insurance right now. You won’t need it once either of the following two conditions is true:
a. Your dependents become independent.
b. Your investments are large enough to replace the income that stops coming in once you die.
Where should I buy life insurance?
The best place to shop for insurance is with an agent who represents many different insurance companies. Stay away from captive agents because they aren’t objective. I broker who deals with hundreds of insurance companies doesn’t care which company provides the coverage and that’s strongly in your favor.
Who doesn’t need life insurance?
If nobody relies on your income for support, you don’t need life insurance. Also, as I said above, if your assets provide enough income to support your dependents, you don’t need insurance to protect your family (but you might be in the tiny minority of people who need estate tax protection offered by whole life).
If you don’t own life insurance, why not?
Note: This post is part of a campaign spearhead by my buddy Jeff Rose of Good Financial Cents. The goal is to raise awareness of the need for the right kind of life insurance by readers of personal finance blogs.