How Much Life Insurance Do I Really Need?
It’s no secret that insurance agents want to sell you the most life insurance at the earliest age possible. Get that out of the way right now. And, I’m in the insurance business and earn my livelihood by placing life insurance policies for families and businesses. It’s an honorable profession and it’s been my calling for over 30 years at this point. I get no better feeling than when I help a young family put together a really solid life insurance plan that makes sense for them based on their current needs. I know that when and if tragedy strikes the family, either by accident or by sickness, I will be the only service provider who will actually be bringing money to the family, not taking money from the family in the form of fees–probate, executor, trustee fees, estate settlement costs, not to mention final expenses like funeral costs. The life insurance professional holds a unique spot in the estate planning team, and it’s a very important one. But, really, how much life insurance do I need?
Not all people share my view of the importance of my role as insurance professional, though. If you read this blog post by Kristen Wong at LifeHacker, you’ll see some pretty contentious comments by people of varied background weighing in on this subject with serious emotion. Read the comments and replies and you’ll quickly realize that many of the commenters seem to have endured some pretty bad, unprofessional experiences with life insurance agents. No wonder the insurance industry’s reputation is somewhat tarnished. If you were to only read these comments, you’d wonder why life insurance was ever invented!
So, I’m going to give you what I think is a pretty good, objective, common sense way to think about your own life insurance needs. First, THERE IS NO WRONG ANSWER! We are all unique and have different needs! Why is this so difficult to understand. Lawyers talk about “fact patterns” when trying to brief or summarize cases so they can come up with a logical, methodical way to solve legal problems. Most cases have somewhat similar “fact patterns” so you can see that people have actually gone through this stuff before us. Differences occur in specific numbers and emotion responses to statements and presentations. Relationships come into play when you are talking with a life insurance agent, for example. Either you trust him/her or you don’t. That feeling is established in the first minute after initial contact, either by phone or in person. If you don’t like or trust the agent, then you won’t like or trust his/her advice. It’s that simple. So, if you don’t like the person trying to help figure out the best approach for your life insurance program, then obviously, you won’t like the advice. Not rocket science here.
Ok, so how do you actually figure out if you even need life insurance? Well, if you’re reading this post, then something in the back of your mind is telling you that you probably do need life insurance of some kind to protect your family from financial catastrophe in case something bad happens. That’s a perfectly appropriate first step–gather some information to see if you follow a certain “fact pattern”, remember that term? Generally speaking, if you have a young family who depends on you to provide money so they can eat, then you probably could use some life insurance just in case you go mountain biking and never come back.
Life Insurance Is A Block Of Capital
Life insurance is nothing more than a block of capital that replaces a breadwinner when that person is gone. The capital is invested to generate income, which represents the income of the breadwinner. There are nuances to this analogy, but this is the general idea. We can get really complicated and run inflation analyses, etc, but the block of capital will still end up being bigger than most people think at first. If you need to replace $100,000 of after-tax income, you would need to divide that number by what you think you would be able to earn in an investment portfolio. Let’s say 5% for this example. This comes out to $2 Million. That’s a huge number if you were to win the lottery, but not if you are 35 years old with a non-working spouse and two young kids at home. As the saying goes, “$2Million just doesn’t go as far as it used to”… If your spouse needs to go back to work, then you have daycare expenses and possibly further educational expenses, not to mention on-going household expenses that continue after you’re gone. You can see where this is going, can’t you?
Now that you’ve identified that you need life insurance and that you could use a couple million dollars worth, what’s next? I would recommend that you read this recent NY Times article which offers pretty good, solid ideas on the types of life insurance and how to structure beneficiaries. These will be future topics here because after 30 years, I’ve seen many situations and mistakes made on proper structure of policies. This article is a good start. Once you’ve done some research, go to my life insurance quote engine on this page and run some numbers for yourself. Don’t take my word for how cheap $2Million of term life insurance can be. See your own numbers and TAKE ACTION to protect your loved ones. The worst thing you can do is to do all of this research and not do anything! Most people just move on to a new web site in search of the “best deal”. There is no “best deal” in life insurance. The best deal is the policy that pays a benefit to your family when you’re gone, plain and simple! Do you think that your spouse will care if you saved $3 a month from company A vs company B? no he/she won’t! Your spouse will never complain about how much the life insurance costs or if there’s too much life insurance benefit. The only complaint will be if there is NO life insurance, or not enough. The choice is yours.