Don’t PassOver: The Four Questions of Life Insurance

Doesn’t it seem like most life insurance conversations are related to the motivation of the accused killer in a syndicated Law and Order episode? Yet life insurance is a critical concern deserving of your limited time. Given an unfortunate circumstance, missing just this one element of an otherwise solid financial plan can add financial ruin to the lives of your survivors.

What appear to be the natural complexities of life insurance prevent many of us from making a wise choice to purchase an appropriate type and amount of life insurance. But when you get down to it, life insurance can be boiled down into answering four relatively straightforward questions. Take one at a time and before long you’ll be checking life insurance off of your “to-do” list.

Question # 1: Do I need life insurance?

It’s completely possible to answer “no” to this question. Think about who will be harmed financially by your untimely demise. If it’s only your stylist, you don’t need life insurance. Don’t worry about Bruce; he’ll find other clients. But if you’ve got children, or have a significant other or parent who depends on your income, life insurance is critical.

It is not only those making an income who need to be insured. Even if you work full-time in the home and receive no salary, there is a tremendous financial cost to the survivors resulting from your early death. As you told your spouse during your last argument, it would cost big bucks to replace the childcare, cleaning, and personal chef responsibilities—in addition to everything else you do.

How would your surviving spouse be able to keep his job and perform all your responsibilities if you were gone? Quite likely, it would be impossible. It is life insurance on the homemaker spouse which would enable the surviving spouse to keep the job he has and afford to hire others to help with the tasks you formerly performed.

Question # 2: How much life insurance do I need?

The basic goal is to satisfy your family’s needs for a specific period of time after you are gone. For example, you might purchase

• enough insurance so that your spouse would not have to work for the rest of the time your children were expected to live in the home.

• You might further choose to purchase enough to pay for your children’s expected college expenses.

• If you also purchased enough insurance so that your spouse would never have to work again and could afford to purchase the Yankees, you’ve probably purchased too much insurance.

Take advantage of the tools available to assist you to estimate an appropriate amount of insurance to purchase at various web sites, including Total Candor’s life insurance needs calculator.

Question # 3: What kind of life insurance should I buy?

Although can’t tell you exactly what to do, I can provide you key considerations and inform you what to be most cautious of. With that information, you will probably know what makes the most sense for your situation.

Broadly speaking, there are two types of life insurance: whole life insurance and term life insurance. Whole life insurance is further divided into other types of policies with buzzwords such as universal, variable, and single premium.

Whole life insurance features an investment component that salespeople love to talk about. It also pays a much higher sales commission, which is less likely to come up in conversation.

Gary: Ahem.

While there are, of course, circumstances where whole life insurance policies make sense, most young families with limited budgets need to maximize their protection per dollar spent and a whole life insurance policy is typically not the best way to do so.

On the other hand, term insurance is the purest kind of insurance. You pay premiums for the specific length of time (the term) the policy covers. If you pay your premiums and you die during the term of the policy, your beneficiary receives the life insurance proceeds. If you do not die during the term of the policy, you get nothing. It’s quite simple.

You: That is simple.

Partly due to this simplicity, it is relatively easy to compare policies among the various companies selling term life insurance. There just aren’t as many numbers (especially when compared to the many variations of whole life insurance policies) to confuse you. Plus, you’ll see you can afford much more protection for the same dollar amount buying a term policy compared to a whole life policy.

Question # 4: Where do I buy life insurance?

Even if your employer offers you a life insurance benefit at work, you owe it to yourself to get a quote for a private policy. Especially if you are young, healthy, and a non-smoker, you’ll likely find that a privately purchased policy will be less expensive than the one offered to you at work.

In addition, life insurance you purchase privately does not depend on your continued employment at your current job. When you go to work for another company or take some time out of the workforce, you can keep your privately purchased life insurance. This advantage is known as portability. Life insurance purchased through your employer is typically not portable, since it is usually not available to you should you leave your job. In most cases, this is true regardless of the reason you leave: quit, layoff, or disability.

I know that talking about death isn’t fun. But failing to put life insurance in place is among the riskiest things you could do to your child. You’d never leave your son alone on a bridge. You’d never look the other way while with your daughter on a boat. Life insurance is much more that just the safety railing or the life raft. Life insurance is you looking after them, just in case, some day, you’re not.

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