Regular readers know I’m not married nor have kids, so life insurance isn’t something pressing in my life. However, it is an important topic I felt needed to be addressed. I asked a favorite blogger of mine, Matt from Mom and Dad Money, to help me out. I always appreciate the informative (and accurate) content on Matt’s site. He is a fee-only financial planner, husband and father which I believe makes him qualified to tell us all about bit about life insurance. I’ll hand it over to Matt….
Ahh, life insurance. Everyone’s favorite topic.
Truth be told, I have a love/hate relationship with life insurance.
When it’s done right, it is one of my favorite tools out there. It’s a relatively low-cost way to give your family a huge amount of financial security, something I value a lot.
The problem is that it’s often done wrong. Life insurance companies like to package their products with all kinds of complicated and convoluted add-ons, all of which serve mostly to line the pockets of the insurance company while leaving the consumer confused as to why they’re paying so much money for something that isn’t doing nearly all of the wonderful things the salesman said it would do.
So today I want to cut through the confusion and make things as simple as possible for you. By the end of this post, you’ll know whether you need life insurance, how to go about getting it, and what to look out for.
Let’s get started!
Do you even need life insurance?
How do you know if you need life insurance? It’s pretty simple actually. There’s only one rule you have to follow:
You need life insurance if there’s anyone who depends on you financially and you don’t have enough money in your bank accounts to satisfy that need.
That’s it really. But to give you something more concrete, here are the three main types of people who need life insurance:
Working parent – You’ve got children and potentially a spouse who depend on your income for their basic needs. If you were to die, your family would need to replace that lost income for at least some period of time. Unless you’ve already got the savings to handle it (and the reality is that almost no one does when they’re starting out), life insurance is the easiest and least expensive way to do it.
Stay-at-home parent – This one is a little less obvious, but if you’re a stay-at-home parent then you’re providing your family with a HUGE financial benefit. Think about all the costs that would have to be added to your family’s budget if you were gone. Childcare alone could be as much as a couple thousand dollars per month. Once again, life insurance would be there to handle those costs.
Married couple with joint debt – In particular, if you’re a couple with a mortgage that would be difficult for one person alone to afford, it might make sense to get enough life insurance just to cover the balance of the mortgage so it could be paid off if one spouse were to die. But any big debts where both spouses are liable could fall under this category.
There may be some unique circumstances that aren’t covered here, but by and large this is it. If you don’t fall into one of these categories, you probably don’t have any need for life insurance and don’t need to waste your money on it.
But if you do, the rest of this post will help you figure out how to get it and what to watch out for.
How to do life insurance right
Life insurance salesmen like to make it sound complicated. The more complicated it seems, the more likely they are to convince you to buy something you don’t need.
But if you know how to sort through all the BS, it can actually be pretty simple to handle. Here’s how to do it.
What type should you get?
There are lots of different kinds of life insurance out there, but 98% of the time the only kind you need to consider is what’s called “term” insurance. It will protect you for a set number of years (usually 10-30), after which the policy will end.
Some people will look down on term insurance because of the fact that it has an end point, but the end point is actually beneficial to you for two main reasons:
- Remember that life insurance is only needed when you have people who depend on you financially. If you’re starting a family, that will likely only be the case for the next 20-30 years, after which the kids will be out of the house (maybe). There’s usually no need for insurance any longer than that.
- Because it has an end date, term insurance is MUCH cheaper than other types of life insurance, making it MUCH easier to actually get the protection you need at a price you can afford.
And remember this: the insurance wasn’t a waste if you don’t die during the term. Even if you never end up needing it (which would be a good thing, right?), that life insurance provided protection during the entire term. No one wears a bullet proof vest hoping to get shot. Pay for the protection and hope you never need it.
How much life insurance do you need?
So how much life insurance should you buy? That’s actually not an easy question.
When my wife and I were buying it for ourselves, I searched the internet far and wide and found it hard to find anything more than a generic rule of thumb like “10x your income”. That frustrated me, so I created my own method for determining how much life insurance you need. It’s not quick, but it takes your individual needs and wants into account to give you a more personal number.
Two quick things to keep in mind here:
- The younger you are, the more likely you are to be surprised by how big a number you end up with. The simple truth is that you have a lot of years of income to protect, and that will likely add up to a pretty big number.
- One of the most common mistakes I see people make is assuming that the life insurance policy they have through their job is enough. Not only is it not likely to be enough coverage, but you could lose your job or your employer could decide to end the benefit at any time. In most cases it will make the most sense to buy your own policy separate from whatever your employer offers.
How do you actually find a policy?
Once you know how much you need, my first stop would be a site like instantquotelifeinsurance.com to get some quotes. I like them because they don’t collect any contact information and from my experience their quotes are accurate. You can do a little bit of research on the companies offering the lowest prices just to make sure they’ve been around a while and are reputable. Then you can call them up directly to get the process started.
An alternative would be to go through an independent life insurance agent. It can be helpful to have someone leading you through the process, especially if you have any medical conditions that might make things a little more complicated. But still make sure to double-check their quotes against a quote site like the one above to make sure they’re not leading you astray. And don’t be afraid to ask them questions if your own research turns up an option that they didn’t show you. And if they seem dodgy, just ditch them for someone else. No need for loyalty here.
If you follow these steps, you can give your family the protection it needs at the best price possible, and hopefully with minimal problems along the way.
A word of warning
If you’re a young professional, it won’t be long before a friend of yours reaches out and asks to talk to you about life insurance. And if you accept, I 100% guarantee that they’ll try to sell you on the wonders of a product called “whole life insurance”.
The pitch is going to sound good. Really good. Almost like a can’t-miss, no-brainer opportunity. I know because I’ve sat through these pitches as a consumer and felt the draw myself. It’s hard to resist.
But I’ve got four words of warning for you:
STAY. THE. HELL. AWAY.
I’m not going to get into a ton of detail here. If you want to know more you can read all of my thoughts on the subject here. Scrolling down and reading some of the comments from the whole life proponents is especially entertaining. They’re incredibly persistent (mostly because their livelihoods depend on it).
Just know this: whole life insurance can, in unique circumstances, be a useful product for an extremely small subset of people, typically those who are incredibly wealthy. But there’s almost no one in the early stages of their working life for whom this is a good product.
In fact, for 98% of the population it’s a complete money pit. It’s an expensive product with complicated terms and conditions that leaves people under-insured and delivers piss-poor investment returns. But other than those tiny little details, it’s pretty great!
FYI, the same things apply for any life insurance product with words like “variable”, “universal”, “cash value” or “indexed” in the name. If it isn’t “term”, be wary.
So when your salesman friend comes knocking, feel free to be a friend and listen to the pitch. But when they’re done, make sure you walk away empty-handed.
That’s all folks!
Life insurance doesn’t have to be sleazy. It doesn’t have to be complicated. It can actually be pretty simple AND provide you and your family with an enormous benefit.
Hopefully this helps removes some of the confusion for you, but if not, please feel free to add a comment with any questions. I’d love to try and help!
What are your thoughts on life insurance? Any single, childless millennials ponying up for it?
Be sure to check out my post over on Mom and Dad Money about dishing out tough love when it comes to finances!
[Love/Hate image taken from Mai Le on Flickr and money from Giphy]