No One Cares About What Kind Of Life Insurance You Buy
You’ve reached a point in your life where you have responsibilities. A spouse, a couple of kids and a mortgage, some loans and a couple of credit cards – the list goes on and on. Then you stop and realize that if you HAVE responsibilities you should probably BE responsible and get some life insurance. After all, you made an oath to your spouse to take care of them, and you’d probably want your family to keep the home even if you were not there to help pay the mortgage. So what kind of life insurance should you buy? WHO CARES! As long as you have SOME type of protection for your family, the KIND you buy really doesn’t matter much. In fact, it’s the last thing to think about when it’s time to make that important purchase.
Priority Number One: The right amount. Life insurance is really just money – future money. It’s money to replace the money that would come from you over your lifetime. Money to make the mortgage and car payments, money to send little Johnny and Susie to college, money for retirement and all of the other things you and your family have planned together. Choosing the right amount of money is the first step to take when purchasing life insurance because it is THE reason you are buying life insurance. You need to know what your life insurance purchase – your future money purchase – is supposed to do if you don’t make it home from work. There are a lot of methods to help determine the right amount of life insurance. A couple of simple ones are as follows:
1. 10 times your annual income: This has been a recommendation of financial planners and insurance agents forever, and there’s a good reason. It’s all about the math, and the math usually works out to 10 x your income if you want to pay off your bills and leave a little extra for college and monthly income needs.
2. D.I.M.E.: DIME stands for Death, Income, Mortgage and Expenses – the first four things you should consider when deciding how much future money you need to buy for your family. How much will it cost for your funeral – probably $10,000. How much income will you need to replace for your spouse – assuming you’ve paid off the mortgage. How much do you owe on your mortgage, and how much of your children’s education do you want to pay for? These things should be taken care of at a minimum, and would allow for your family to continue on in the lifestyle they are accustomed to without fear of losing a home or putting food on the table.
Priority Number Two: The family budget. It does you no good to overspend and buy more than you can afford for an expensive policy, because you’ll probably end up cancelling it down the road and end up with nothing; and then nothing is what your family will end up with! Statistically, life insurance policies are cancelled after 7 years. You need your future money – your life insurance – to be there when you die. Unless you know when that is going to be, you need to plan on paying for your life insurance for a long time (until your dead, or you no longer need money for the family). You can always change the type of policy you own to fit the budget, but if you wait to buy life insurance until you can afford the best then you may never end up getting it all. Conversely, if you over spend for the best of the best now, but can’t really afford it then you’ll just get rid of it eventually anyway. Either scenario leads to problems for those you leave behind, so before you focus on what KIND of life insurance you are going to buy, start by figuring out your budget.
Priority Number Three: The type of life insurance. There are a lot of bells and whistles that can be added to life insurance, and a lot of excellent tax strategies that policies can be used for as well. However, if you can’t afford the payments – WHO CARES! You should have a long-term policy to last you until you die, but if you can’t afford that now then don’t worry about it. Get what you NEED now, and switch it to what you WANT later as your budget allows. I came across a young couple about 10 years ago who had 3 small children, a big mortgage, 2 working parents and NO life insurance. They had been discussing life insurance for years since their first child was born, but had never purchased any because they wanted a long-term policy that they could not afford. When we met they put me off as well, stating they would wait until next year when they could afford the policy they wanted. Unfortunately, the husband did not make it to next year. At 33 he died and left his wife with a mortgage, 3 kids and NO money. She stopped at my office on the way to the funeral to ask if maybe the husband had met with me without her knowledge to get some type of protection, but he had not. She purchased life insurance right then and there, dressed in black on the way to her husband’s funeral. It was one of the saddest days of my career, and one I will never forget.
The loss of a spouse or parent is emotionally devastating. Make sure it is not financially devastating as well. Life insurance is just future money – money your family will need to continue with the life you were building together. Make sure you have the right amount of protection if something were to happen to you, and that it fits in the family budget. After all, a widow never asks what KIND of life insurance her spouse had.
By Robert Edgin