As a husband and soon-to-be-father, I worry about certain things. I worry about reaching the financial summit, so my wife and I can be financially secure. I worry about a safe delivery for my wife and my future child. I worry about whether they would be okay, when I am gone (and by this I mean financially). I know that losing a loved-one is very difficult, but with money problems it can become even more difficult. I don't want my wife to have to worry about money, if I happen to die early.
So, yes, this is the doom and gloom article, but it is also necessary. Everybody throughout history has died. I am going to die someday. You are going to die someday. We don't have any control over this fact, so we must be prepared for this time to come. How do you prepare? Is life insurance a necessary part of preparing for death that will eventually hit all of us?
You prepare for death in three ways:
- Having a will, so your wishes are carried out (covered in a later article).
- Having a conversation with your spouse, so they know how to access everything financially (covered in a later article).
- Having life insurance (in certain circumstances).
All three of these are important, but I placed the conversation and the will ahead of life insurance, because those two are the most important. Having a will guarantees that your wishes while you were alive are carried out after your death. A conversation about how to access all accounts will help your spouse be able to access the money that you have saved for times like these. There is no need to put more burdens on a spouse who just lost the love of their life. They would have to worry about finding access to the financial accounts instead of grieving. Don't let it get to this point, because a spouse who is prepared doesn't have to worry about money, but instead can grieve appropriately with out this burden.
Earlier in this article, I stated that life insurance is only needed in certain circumstances. This is true that not everybody needs life insurance. The following people don't need life insurance:
- Anyone with large net worths.
- Anyone without debt and their assets can support the family.
- Anyone with no children living at home and can live off of their assets.
- Anyone who is single that doesn't have a family to support.
Basically, you don't need life insurance if your assets (savings and investments) would be enough that your spouse could live comfortably. I would say that this point arises, when there are no kids in the house and there is no debt left to be paid off.
If you don't fall in the above categories, then you need life insurance. Both my wife and I have life insurance. We have even talked about how to use the money if I die. I told her to take the money and pay off the house, and then with the rest of it get some advice about investing and saving it. I personally believe that it would be good for my wife to pay off the house. This would allow her to be debt free and all she would have to worry about would be the monthly bills to support the family. She would need less money monthly to support the family than if she had a mortgage payment.
You need life insurance in the following times:
- You have lots of debt and not a lot of assets (the life insurance could help your family get out of debt).
- You have children at home and your family relies on your income to support the family.
- You are supporting your kids in college and your income is needed to help pay for college.
- You have a mortgage and your income is needed to help make the payment.
- You are a stay-at-home mom and losing you would require a baby sitter. The life insurance needs to be used to pay for services of a baby sitter.
Let me know if there any other life circumstances that would require life insurance.
What type of life insurance should you purchase?
So, you decided that you need life insurance. Now, you must decide what type of life insurance to purchase. There are three main products out there and I only like one of the products. The three products are term insurance, whole life insurance and universal life insurance. My wife and I took out a policy 3 years ago and the insurance provider showed us two options: term and whole-life. We discussed the decision and decided on term insurance. We did this for three reasons:
- Term insurance is cheaper because it only pays for the insurance.
- Whole-life insurance has investing and fees rolled into the product (life insurance agents make a big commission on this product from the fees, which takes away from your returns).
- I like to keep investing and insurance separate.
I personally believe and have read a lot of research that whole life and universal life insurance products are not good for the consumer. The main reason that I hear this is because there are lots of fees associated with these products and this will diminish your returns. Therefore, I only took out a term insurance policy and invest money on my own terms and in my own retirement vehicles. The whole and universal life insurance agents will push these products on the consumer, but be very careful and research these products before signing anything. They can be very persuasive and even make you question some of your beliefs (this happened to me recently - story coming soon).
How much life insurance is enough?
This decision can be a very difficult one and could lead to a lot of research. An article from forbes.com lays out a great way to decide how much to take out in life insurance. They went very in depth and I would suggest reading the article if you want more information. However, I use the calculation provided by Dave Ramsey at Ramsey Solutions. He suggests that you take out a policy 10 to 12 times your income. So, somebody making $25,000 would need a $250,000 policy. I use this calculation, because it is simple and straight forward.
Putting It All Together
Life insurance is an important topic and it is important to decide if your life stage requires life insurance or not. My wife and I need life insurance at our current life stage. This could change later in life when we are empty nesters and our investments could more than cover the loss of either one of us. This decision is important and should not be taken lightly. Some people focus more on their football teams and their favorite TV shows than they focus on finances each month. I know that money is not everything, but it is important in our society. So, you need to take time frequently (even monthly) to look at your financial plan and make sure that everything is set up for future success and even the possibility of death.