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Should You Have Life Insurance?

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Do you ever wonder if you need life insurance? And then, beyond that, how much should the policy be for? $100,000? $250,000? $500,000? $1,000,000??? It seems like every source has different information. Life insurance really doesn’t have to be complex. It’s actually very simple. Answer these questions, and you’ll know within minutes whether you should have life insurance or not.

  • Do you have any dependants?
  • Would your long term savings run out for your family in less than 10 years if you died? (if you have no dependants, the answer to this question is “no”)

It really is as simple as that. If you answered yes to both questions, then you should have life insurance.

 

I currently have a life insurance policy on myself because my wife is somewhat of a dependant. Sure, she works a full-time job, but the loss of both my income and the services I offer around the house could really make things difficult for her.

We currently do not have a policy for my wife, though. If she passed, things could be tough, but our current expenses would easily be covered by my current income. Plus, our current savings would cover any initial funural costs.

Life Insurance For Children?

Some insurance agents insist that you should purchase a policy for your children. I would strongly advise against that. First of all, it is extremely rare for a child to die, and secondly, they contribute no financial help to the family, so if they pass the only expense you’ll incur will be the funeral costs.

I know it’s a little morbid to talk about death, but life insurance is a necessary expense if you truly love your family and want what’s best for them. If you do not have a life insurance policy on yourself, then they will most likely have a very difficult life. Nobody wants that, do you? I suggest you take a look at some policies today.

Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

18 Comments

  1. Both my wife and I have term life insurance! I see it as income replacement until we retire. If one of us died, it would affect our long term financial plans. Isn’t that is why you have life insurance?

    • You’ve got it! Unless you’ve got over a million bucks, I’d say life insurance is pretty essential.

  2. Dave has life insurance through work but it only covers one year’s salary if he passed. We don’t have many expenses at this time, but we’ll have to get it in the near future if we get a house next year!

    • Definitely get a bigger policy if you own a house with a big mortgage. The standard life insurance policy should cover 10 years worth of your husband’s wages. Go with term life – it’s extremely cheap.

      • Term is the most expensive.

        The “price tag” for term insurance is only cheap when you are young and healthy.

        Only 1% of all term life policies ever pay a claim. The premiums you make on a term insurance contact will rarely be recapture and those dollars are lost forever.

        Since premiums increase over time, you don’t recapture the cost of premiums, and there is a lost opportunity cost, it’s the most expensive.

        Which policies do banks use to invest their money?
        Which policies do the wealthy use?
        Which policies do most major corporations use on their valued employees?

        There’s a time and place for every product, and I’m not against having a term life policy, but it’s important to understand how it works from a licensed professional.

        • Here’s the general idea with getting term insurance. You monthly fee might only cost you $15 per month rather than $100. If you’d put that extra $85 into an investment fund over the course of your life, then you would receive far more in your investment account than you would have if you went for the whole life insurance policy. Insurance hardly ever pays, so you may as well buy the cheap stuff and invest the difference!

  3. Thanks for keeping the overview so simple, this helps in understanding if there is a need for life insurance. A great example of the value of life insurance can be seen with basketball player Lamar Odom. His mom died when he was growing up and her policy enabled Lamar to go to school and have a shot at the NBA.

    • Thanks for the story about Lamar Odom. It really shows the importance of life insurance.

  4. I understand the theory, and investments Can be incredibly important, but to say to everyone with their unique financial pictures, that term is the solution is not wise. People have different ages, incomes, and health, and one product does not rule them all.

    I’d love to see some of your real examples of how and when investing the difference outperforms whole life. Since I work with it everyday, do the math, and construct the custom policies, I’m just a guy that likes to see facts.

    • Before I do the math, wouldn’t it just make sense that a person not paying the fees of the entire insurance company and the fees of the mutual fund agents would naturally earn more on their investment? On average, whole life insurance/investment policies only earn 2% per year.

      • “On average, whole life insurance/investment policies only earn 2% per year.”

        Where did you get that information? That seems like you’re just fishing.

        If I have a $1,000,000 mutual fund account, and I’m making 1% annually in fees… that’s a massive amount of commission. $10,000 ongoing. Unless a person is either very unhealthy or in their late 60s I’m not going to make close to that on a whole life policy. Especially considering that mutual fund fees are ongoing. Don’t forget, I still have to pay taxes on my gains, IF I have gains. Do you know how front loaded fees or back loaded fees work in mutual funds?

        Here’s an article wrote by a Richard Miller, who has been a well-respected advisor for decades. He wrote this in regards to Whole Life, and explains how the Internal Rate of Return works: http://www.assurity.com/Pdfs/WholeLife_Miller.pdf

        I’m not trying to throw a punch, but if you’re going to make a claim that “whole life policies earn 2% a year”, just be prepared. Every company’s policy is designed differently, and not all of them are mutual companies.

        • If Richard Miller is an advisor, of course he’s going to suggest a policy that pays him quite a lot of money. Did you know that Index Funds are often the best investment out there, but since they don’t pay hardly anything to the brokers, nobody suggests it! I would like to hear someone promote Whole Life that doesn’t sell it for a living. Here are my references for my 2% claim.

          http://www.wisebread.com/should-life-insurance-be-purchased-as-an-investment
          http://www.daveramsey.com/article/the-truth-about-life-insurance/

          I don’t mean to throw punches either. I just want to give my readers accurate and helpful information. I actually thank you for challenging me on this Brad, because maybe I’m wrong! Maybe there are policies that are actually fantastic investments! Thanks for the comments. I look forward to hearing from you again.

          • I think I need to make one thing clear – I don’t look at whole life as a replacement for investing, but I do view it as a cornerstone for a financial picture.

            As far as the comment about an advisor only choosing a more profitable product, I personally feel that’s a statement out of ignorance. You can’t truly believe that not one well-respected professional will only look out for his paycheck and not for the client. Term insurance is a far less commission for me and I sell it just as much as whole life. I would continue to sell whole life even if it was equal commission as term.

            Index funds are amazing, and I promote them currently over most other types if it’s the right timing for a client.

            Neither of those articles show true data based on actual policies and their performance. I certainly can’t take Ramsey seriously on whole life and he’s very inaccurate on many other products as well:
            http://badmoneyadvice.com/2009/05/ten-things-dave-ramsey-got-wrong.html

            Please look into the true Internal Rate of Return from actual Mutual Life Insurance companies and their performance. Most companies have their dividend history as public information, and also provide what was “illustrated” vs what was actual.

            http://www.twintierfinancial.com/whole-life-insurance-theory-to-practice/

            I’m glad to have a good discussion about this – my biggest concern is educating with facts, not opinions. Ramsey has amazing debt advice, but his investment advice is very sub-par and can be proven so time and time again.

          • Of course when I speak of advisors promoting the high commission product, it is a generality, but everyone is motivated by money. After all, we need it to survive! You, Brad, sound like one of the good ones though. Thanks again for the comment.

  5. Stay at home wife and 3 young children. One mill on me and $750k on my wife.

    • Yep. If you wife is a stay at home mom, it’s a great idea to get life insurance on her. If you tried to replace everything she did, you might be out of pocket over $100,000 a year! Good job taking action on this.

  6. Thanks Derek. I think that this is one of those things that couples tend to overlook, procrastinate, or not budget for. But I feel its a pretty big deal.

  7. I WILL NEVER DIE!!! I DON’T CARE ABOUT MY WIFE!!! WHEN I DIE, IT WONT MATTER WHAT HAPPENS!!! Well, these statements, which we have heard, may sound selfish but they are a what some people feel. And feelings do matter. As a matter of fact, I am willing to bet that most people buy life insurance on feeling rather than logic. I LOVE MY WIFE SO…I LOVE MY FAMILY SO… I LOVE MY CAT SO…I LOVE MYSELF SO…and on and on.
    Santa Maria, Ca.


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