I get the question all the time. Sometimes it’s from customers, sometimes it’s on a plane after I say what I do for a living.
I was recently interviewed about this topic by Editor Kim Lankford for Kiplinger’s magazine. Kiplinger’s is pretty much the first and last word when it comes to personal finance, and Kim always does a great job capturing the importance of life insurance and conveying my passion for the product.
So, what IS life insurance and who needs it? Life Insurance is a contract with a large financial institution; a contract that promises to pay a bunch of money to your loved ones when you die. If you have anyone in the world that you care about, anyone who depends on you financially (like your family!), YOU need to have it. Why? Because there is no other product that does what insurance does—delivering dollars for pennies—at the exact moment it’s needed most.
Understand that life insurance can’t replace YOU (a father, husband, wife, or mother), but it CAN replace your economic value to your family. It secures your family’s financial future, protects them against the unexpected, and, in my opinion, is the most important product mankind ever invented (with the possible exception of the wheel).
But how much should you buy?
This is the question everyone wants to know the answer to. Well, there’s no quick answer, and as you know, if you read this blog, I’m not a huge fan of rules of thumb. But for the sake of this post, here are some things you may want to consider when determining how much life insurance to buy:
Debt—If you’ve taken out a loan or mortgage, the face amount of your policy should be large enough to cover these debts (and have some left over for your dependents)
Expenses—Make sure your beneficiary receives enough for final expenses, death taxes, funeral costs, bills, and other day-to-day expenses
The future—You can’t anticipate exactly what your family will need in the future, but make sure your death benefit is enough to cover your kids’ college tuition, weddings and monthly bills
Income replacement—If your family depends on you to be the bread winner, when you die, life insurance needs to replace your income; how many years of your income will you need to replace is up to you, but the math is really pretty easy
Over the years, I’ve heard several ‘rules of thumb’ (which I hate), but they do provide a place to start. In some cases, 10x income is appropriate, but in others, it’s not. For example, a man in his 30s with two children probably needs more than 10x his income (20x or 30x is more like it), while a highly paid executive in his 60s with kids already out of college might need less than 10x his income.
There are many life insurance needs calculators on the web, including the one on our website. Most people are shocked at the number it takes to replace their economic value. The good news is that they are equally shocked at how INEXPENSIVE it is. According to LIMRA, the industry’s research arm, younger folks overestimate the cost of life insurance by a factor of 7, while older folks overestimate what life insurance will cost by a factor of 3!
How cheap is it?
As I mentioned in my Kiplinger’s interview, a 30-year-old man wanting $1 million in coverage (20-year term) would only pay $421 annually. A woman of the same age would pay even lesser—only $354 per year.
A ONE MILLION dollar policy, with a 20-year rate guarantee, for just over a dollar a day? Really? Really!
Anyone depending you financially? What’s your excuse now?!?!