Preparing for the unknown is a really scary thing.
Maybe you are asking yourself, “Am I prepared to die?” If you unsure about what happens after death, we want you to know.
That’s a really poor way to lead into a conversation and there are so many ways that question can be answered.
Life Insurance is Really Death Insurance…
Have you ever thought about life insurance? It’s sort of a crazy concept.
Pay a company money so that, when you die (no longer living, so why call it ‘life’ insurance?), you can get paid. It sounds kind of crazy, though, because you pay money for money that you will never use and isn’t even for you.
So, Why Should I Even Pay For It?
It is to ensure that your spouse/children/grandchildren/organization/etc. has money to support them or their cause after you die. In other words, it provides a safety net.
Consider this, you are 30 years old, married with 3 beautiful little ones. You have a great job with a higher income than your spouse) and a total household income of $100,000. You are doing pretty well. You have a little bit of money left to pay on 2 cars and have $120,000 left to pay on a mortgage. You have talked with your friends about life insurance, but after hearing that none of them have it, you decided there was no need to purchase it either.
One rainy night, you are on the way home with your amazing family from an evening meal and are involved in an automobile accident.
Tragically, you are killed. What happens next?
Your spouse is left struggling trying to figure out how to put the pieces of his/her life back together and unsure how to pay off all of this debt with only one salary. There is some money in savings, but only enough for the funeral and burial expenses. There is not nearly enough to pay for the mortgage and not enough to supplement the income.
If you had purchased life insurance, some of these concerns may have been easier to manage or possibly avoided.
Things We Don’t Want to Think About
We are often told to “save for a rainy day”. Saving up for the unknown is a necessity in our lives and unfortunately is one that many tend to overlook.
We know we should invest in the basic stuff like health insurance, homeowners/renters insurance, and auto insurance. These may even be requirements for loans/mortgages. But then there are all of those other insurances you can purchase, like pet insurance, burial insurance, job loss insurance and more.
Paying for any insurance is paying for comfort during uncomfortable times.
Now, this is not to say that insurance will automatically make everything easier, nor paying for it will allow you to act recklessly in your lifestyle choices.
This is usually quite the opposite!
For instance, despite paying for homeowners or renters insurance, you still act reasonably by locking your front doors and have working smoking detectors in your home. If you don’t have working smoke detectors in your home, please check them ASAP!
Paying for any insurance is paying for comfort during uncomfortable times. If you didn’t have homeowners or renters insurance and your home burned down, could you afford to pay the entire replacement costs of the structure and contents? Possibly not.
As an example, most people, including us, significantly underestimate the potential replacement costs of the structure and contents. If it wasn’t for homeowners insurance, I do not know where we would be today! We say this after having gone through a house fire almost 5 years ago and learning this first hand!
Life insurance allows us to live more comfortably knowing that we have money available should either of us pass away unexpectedly.
Life Insurance: Two Types to Choose From
Life insurance is equally as important as homeowners insurance. After all, when are you going to die? The truth is, none of us know the answer to that question, but, just like taxes, it eventually happens to all of us whether we like it or not.
On the Dave Ramsey website there are some great tools and resources for helping you decide on purchasing life insurance.
Term Life Insurance
The first type is term Term life insurance is considered a “basic” life insurance because the policyholder is only purchasing insurance for a specified period of time. The terms may be 10, 20, 30, 40, 50+ year plans and the policyholder only purchases insurance during that timeframe. Some insurers will allow you to roll your policy into longer terms as you age to continue with your coverage. Generally term life insurance is cheaper than whole life because you aren’t purchasing for the persons entire lifetime. It may seem counterintuitive because you expect life insurance to “insure you for life.”
Term life insurance is usually the cheaper option and almost always contributions are tax free. Term insurance allows you to get a larger amount for a lower rate.
Whole Life/Universal Life Insurance
The second type is whole or universal. Whole Life/Universal Life insurance is sometimes referred to as Cash Value insurance. This is an insurance plan that combines a death benefit (like with a term policy) with a savings component or cash value building up over time on a tax-deferred basis. The savings portion of the plan can often be cashed in or borrowed from at some future point and taxes may be taken out at that time.
Whole life insurance policies are expected to be for the policyholders life and not as a savings plan, so if the money is withdrawn prior to a specified time period (10, 20, 30 years) then an early withdrawal penalty is collected. In the early years of the insurance plan, a large component of the premium is used for the savings plan to accrue compound interest. Then in the later years, when the policyholder is older and the cost of insuring them is higher, more of each premium will go toward the purchase of (death) insurance and less into the savings component.
How Much Should I Get?
When considering life insurance, the usual recommendation is to purchase 10x your annual salary. For instance is you make $50,000 annually, then you should consider $500,000 in coverage for each spouse. You can consider a lower amount as this is just a general rule of thumb. as a comparison, we have a household income of less than $100,000 and have $250,000 for each spouse through SBLI. This may not seem like a large enough plan, however, our annual expenses are around $30,000 and $250,000 would go a decent ways as we are debt free.
What Do We Recommend?
Life insurance should be simple. When only looking at the names term vs whole life, one may be inclined to get a whole life policy because it covers you for an entire lifespan (the same can be done through term, too). It may also be tempting to get a whole life plan because it is often sold as “an investment opportunity.” Life insurance should NEVER be used as an investment opportunity. Death has a pretty poor ROI.
That’s why we recommend purchasing a term life insurance policy as it is straightforward (not a two part plan like whole life), inexpensive, and designed to do one thing over the long-term: support your loved ones when you die. Remember, the death benefits of a term life insurance policy are almost always tax-free.
No one wants to talk about it, but we have to. You need life insurance, and when you’re gone, those you love will be grieving. Leaving them loads of debt without the comfort of savings is avoidable. Help them be financially secure.
If you are curious more about life insurance, Zander is one option and comes recommended by Dave Ramsey.