You insure you home because it is worth $100,000 or more ... you insure new cars because they are worth $10,000 or $20,000 ... so if something happens to these investments you would lose a lot of money. So you insure things that help you live like you want to and things that are worth a lot of money.
Lets imagine that you have a goose in the basement of your house that lays golden eggs. Everyday you go to the goose and get an egg worth hundreds of dollars. Year in and year out that goose is popping out golden eggs just for you and your family.
What would you insure that goose for? $100,000, $250,000, a million dollars? Would you say that a golden egg laying goose is nearly priceless and it's loss would hurt your family's standard of living? Of course it's priceless, it's worth more than the house you house it in ... you can always get another house but money everyday, that's priceless.
Okay, so the goose is "YOU"! You bring home a paycheck that your family depends on and you do that everyday month after month, year after year. You are priceless to your family so what do you have in life insurance? Is it enough to replace all the income you would have brought home during your working years? No one wants to think about it but if you died tonight how would your family live? Would they be able to stay in the house they know as home? Would they be able to maintain the same standard of living? Would your spouse have to get a second job and send the children to daycare while they struggled to make ends meet?
Think about that ... then tell me what you think is the most important type of insurance. Life insurance is the difference between a sad day and an unbearable lifetime of loss. If your family loses one of the most important people in their lives it is devastating, but if they lose their income in the same day it would be horrific. So don't EVER go without life insurance. It is more important than any other form of insurance.
Now having said that, the question is how much insurance and what type should you have, and that is a very personal question. I'll give you a quick overview of how to figure what you need and what type would work best for you but, you need to see a professional that you trust and talk through your needs.
Okay ... much do you need? Well, the basic formula is based on 4 basic needs;
1. Final expenses (which is about $10,000 average).
2. Pay off debt (home, autos, credit cards).
3. Provide for the children's higher education (some folks want to pay for it all and some say they need to pay for it themselves and still others say they want to pay half).
4. Provide for the lose of income (some experts say 10 years some say 5 years but this is the big one).
The first two are easy, ten grand for the final expenses unless you have a more extravagant funeral planned for yourself. Cremation can be a little cheaper but will still run you $7,000 in our neck of the woods. Of course if you have a huge memorial made from imported Indian marble or a deluxe plot next to your favorite movie star you'll need to add that to the cost. Debt is a personal question but it has a definite answer as well, how much do you owe? Add that amount to the final expense. The average family in America owes $8,400 in credit card debt, $14,000 in car loans or educational loans, and $85,000 in mortgage debt. So most families will put somewhere in the neighbor hood of $108,000 in total debt.
Number three is a huge question mark for most families, if you have more than one child and you are in the middle to upper middle class you may have plans to pay for their school 100% but more than one or a lower income may indicate that you need to plan to plan only part of their college costs. Or perhaps you paid for your own education and you feel that they should too ... there is no right or wrong answer here only a choice that reflects your personal values and needs. On average a bachelor degree will take 5 years to complete and tuition will cost about $12,000 a year so lets say the average household would want to pay half of their two children's' education so we'll put $60,000 in this example.
Finally, how much income do you need to replace? I like the five year rule. No science here I just think that it is an easy number to come up with and easy to wrap your head around. Five years of income is enough to support the family while your spouse returns to school to get new training and a better job, or it is a big enough stake to invest and draw a reduced income for a longer period of time, supplementing the family income until the children leave the house and are on their own. The average income for an individual in the US regardless of age, education or gender is (depending on who you ask) about $37,000, so that is what we will assume for our example. Which means we will plug $185,000 in the formula.
1. Final Expense = $10,000
2. Debt = $108,000
3. Child's Education = $60,000
4. Income replacement = $185,000
Total = $363,000 in needed death benefit
Most people have some life insurance at work is two times your salary so you can subtract $74,000 from the total need, which leaves $289,000 that our imaginary family provider needs to protect his family.
So, what type does he (or she) need? Term? Level Term? Return of Premium Term? Whole life? Universal Life? Again, I have some ideas but you have to discuss your situation with a professional you trust, to decide which you need.
Quickly ... here is my opinion, "coverage is the most important thing!" Some of these types of insurance have great benefits over the others but first and foremost you need to secure the amount that you need.
Term is the cheapest but if you stop paying on it before you die, you get nothing, plus the price is based on your current age so it will increase in cost each year that you own it.
Level Term is more expensive but it doesn't increase for 10, 20 or 30 years ... at the end of the 10, 20, or 30 years, the cost will increase dramatically. If you stop paying on this before you die you get nothing.
Return of Premium Term is more expensive still and is just like the Level Term except that you get all the premium back at the end of the 10, 20, or 30 year term if you don't die.
Universal Life is a whole life policy based on interest rates the cost never increases and the value is tied to the interest rates of the day. So the cash value available at retirement age will be great if interest rates where high during the time you held this product or not so great if they were low during the time you held it. It is generally more expensive than the Return of Premium Term, but the values are not guaranteed.
Whole life is the most expensive type of life insurance but it gains value based on dividends and that is the most consistent and rapid way to gain cash value in a life insurance policy. Values are not guaranteed but, you can judge the likely hood of success by the longevity of the company in your community.
This is important stuff so call your agent today to talk about it.
