The Importance of Life Insurance

the importance of life insuranceIf you don’t have life insurance and you have a family that you support, today is your day. Part of preparation is for our benefit and part of it is for the benefit of our loved ones. In this case you and I won’t have any tangible benefit from purchasing life insurance, but the peace of knowing that our loved ones will have a nice financial buffer is pretty nice.

Related: What is the Christian view of Life Insurance?

Just like the FLOP we mentioned the other day, the hope is that you will never need to use this. But if that day were ever to come, there would be some people in your life who were really glad that you and I spent an hour or two taking care of it.

After this article went live, we got this comment from a reader on the Facebook Page:

“I totally agree! In 1995, my husband of 9 years died and we did not have term insurance…I was left with 2 small boys and very little money. When I remarried in 1998, that was the first thing we purchased as husband and wife…thank God I have not needed it, but it’s nice to know it’s there just in case…”

There is a lot of debate about all the details of what kind and how much, and everyone’s situation is unique. So just take what I suggest as an opinion and do more homework to figure out what kind you need.

What kind do I need?

For most people and most situations I think Term Life insurance is the best bet. It is the cheapest kind of insurance and the easiest to understand. It is as simple as agreeing to pay $100/year for 10 years to have $100,000 of coverage. Whole life (and most other forms) are a bit more complex and can offer some benefits for certain situations, but again term is normally your best best.

So how much do I need?

This is like asking what is a good salary? Everyone’s definition will be different. The rule-of-thumb that I have commonly heard is 8-12x your annual salary (after tax). But I suggest you think through your particular situation and think through what your family would need.

In our particular case, I bought a term policy that would pay off the house and cover my funeral expenses. This is far less than the 8-12x figure, but because we don’t have kids yet and my wife earns an income she would easily be able maintain her standard of living if the house were paid off.

Your situation will be different. But just spend a few minutes discussing and thinking how your family would get along if you left the earth a little early.

Remember, don’t get hung up on the details. The key is just to first make sure that your family is covered, then you can split hairs on the details. My hunch is that most of our loved ones won’t give a lot of thought to how big the life insurance check is, they will just be grateful that it is there.

How much does it cost?

I was surprised how cheap term-life insurance can be. Granted, I am very young (30) and in good health, but relative to a lot of other expenses we all have it is really cheap. I think I am paying $123/year for my policy – which comes out to about $10/month.

Homework

  1. Talk to your spouse and figure out how much insurance you think you need.
  2. Get a life insurance quote online or find a trustworthy insurance agent and have them help you.

 

















FTC Disclosure of Material Connection: In order for us to maintain this website, some of the links in the post above may be affiliate links. Regardless, we only recommend products or services we use personally and/or believe will add value to readers. Read more here.

20 Comments
Add a comment
  1. Hi Bob. Great video! I noticed that the “calculator” and “learn more” links above send us to Bankrate. But, there is a better place on the web for this information that is non-profit and dedicated to life insurance (not necessarily primarily a lead source for financial services as Bankrate is). Check out http://www.lifehappens.org. This is a non-profit organization with the only agenda being to help people get life insurance right (along with some other insurances). Their information is the best on the web for life insurance. Since their information is unbiased, and since they are not sales agents and not a financial services marketing firm, their information can be trusted! Check out http://www.lifehappens.org! (ps, I’m not affiliated with them at all, but send people to them all the time).

  2. These articles have helped me see the reality and importance of preparing my resources for those I care about beyond my own death. The fact that your wife and children’s protection and provision were a motivation for a life insurance policy and organizing everything onto “one page” reminded me of 1 Timothy 5:8. For single guys, how can we think about financial organization in this way? Is it too soon to think about life insurance?

  3. Hi Bob,
    It’s critical to point out the importance of PROPER protection for the family left behind. The $10/mo quote you mention sounds like a term policy with a ‘teaser’ premium for a certain amount of time. Seems super-affordable, until you realize the premium balloons down the road to make up for that underpayment. Much like the ARM loans that caught so many homeowners off-guard. This can leave families just as vulnerable as an exploding interest rate!
    Using your example, say that low payment is locked for only 10 years. In the meantime, you have child(ren) and your protection needs change, so you seek to update your coverage. By this point, health factors (high blood pressure, cholesterol, unknown hereditary, etc) could make you UN-insurable, not to mention potential external impacts to your mortality (accidents, surgery, infection, etc).
    So now you’re faced with a ‘something is better than nothing’ life insurance policy, with an indeterminate, ever-escalating payment.
    For folks who are young & healthy, it makes most sense to lock in a low premium that will remain fixed for the entire term of the policy (30-35yrs). Depending on coverage needs, it will still be affordable (<$50/mo), and provide additional peace of mind.

    • Nik, the 10-10-10 figure I was talking about wasn’t an actual quote, it was an example just attempting to show the simplicity of term insurance over most other forms of life insurance. That said, I think having proper protection is important but still less important than just having something. There are far too many people who are confused about the whole topic, so they just ignore it completely. I would much rather someone (who wouldn’t otherwise make the purchase) be a little under-insured, than not have anything at all.

  4. Going with an individual term policy over group or employer term policies helps avoid the “teaser premium” issue. Of course, the best thing to do when shopping and/or purchasing is to ask “does this premium ever change?” Work with an agent you feel is trustworthy (be in business with the right people) and MANY common problems are avoided!
    -Tom

  5. While I’m quite confident I could make it w/o the life insurance on DH should he pass on early, I do have a lot more security knowing it’s there.

  6. im still a little skeptical about life insurance.after taking the advice of some respected people in the finance industry,im in two minds whether to set aside a certain cum of money in a seperate account that will mature over time,and use this as my backbone in case of trouble times

  7. I know we all think we will live forever and death is something we are in denial of, especially when you’re young. But I am into middle age now and have never bothered to take out any cover and find myself wondering what a letdown I would be if I was to leave this world and not have sorted anything to ensure my wife does not suffer any more than she need to.

    I have to confess that I am not good at understanding these things and in some respects that has tended to have me shy away a little from taking out cover. I have come to realize that this is somewhat unacceptable as not to take care of my wife’s future after my passing is not a consideration.

    Your article has been the final push and I know it is time to act, as I’m not getting any younger. I’m grateful you are making it simple here with your online tools and I know I must sit down with someone and find out what is the best policy for me.

    Its as simple as imagining I’m not here and seeing how ill prepared I have left things and I see her only having problems, all because I have spent a lifetime dodging the issue.

  8. DesertRat

    I have no family of my own but I have insurance to cover my inal expenses. That always seemed right to do.

  9. I definitely agree people should have life insurance, but for young families, disability happens a LOT more often. While losing a loved one is much more difficult event, having someone out of work for a period of time (difficult pregnancy, car accident, illness) can be just as challenging and ingflict the loss of a paycheck. Most people assume they are covered at work – that is often not the case. You should be encouraging folks to buy disability insurance as well given that disabilities happen much more frequently.

  10. Hey Bob,

    My wife recently began working for New York Life, having had no prior experience in any kind of insurance or sales. She had to undergo extensive training in order to become an agent. Anyway, during that process we obviously both learned a lot about life insurance. New York Life’s flagship product is their whole life. While we realize that NYL has a quite different whole life, we were still disappointed in Christians biases against whole life. Most Christians that we have talked to have some nebulous concerns against whole life. In the long run, whole life is definitely better – unless you do happen to die in the first 10 years of your insurance. You get complete return of premium within 10-20 years depending on the policy – unlike term where your money is just gone. With whole life you have the living benefit of cash value, which you can borrow against or withdraw. The difference between term and whole life is the same difference between renting or buying a home. I don’t think that renting for your entire life is a good idea. Plus, when you have term and your term runs out, you are that many years older and the term will be significantly more expense – and that happens each time your term runs out. I am just curious as to why you would generally recommend term insurance.

    • Tim, I think the reason term is better than whole is because of the cost difference. Term is a lot less expensive. And typically, the returns on whole life are pretty low compared to other investments. Agents make more commission on whole life because it is more expensive for the consumer and there are better profit margins for the agent. I could be wrong, anyone else out there agree?

      • @john Agreed!

        @bob The point of carrying insurance (life or otherwise) is to cover a loss we cannot otherwise fund. If we have enough assets saved to leave behind, our beneficiaries will be fine financially, making life insurance unnecessary. Well, we should all cross that net-worth threshold at some point on our way to saving for retirement, correct?
        The challenge whole life insurance poses for middle-income families is the hefty monthly premium standing in the way of personal IRA contributions. (Suspending the commentary on how ‘pay yourself first’ is lost on most folks. Somehow $200/mo cable & phone bills became top priorities.) So with whole life, our retirement is completely dependant on a ‘cash value’ with an average guaranteed growth of 4%. Yet borrowing that ‘cash value’ comes with an average charge of 8% interest. And that ‘cash value’ (our retirement) is eroded to continually pay the costly premiums for life insurance in our later years… Until it runs out. Leaving us with neither savings nor life insurance. The math never works out in favor of the client.
        There is no such thing as ‘return of premium’. NYL’s gold-topped building in Manhattan isn’t paid for with favors & freebies. Clients are simply overcharged to receive that ‘benefit’ later. Just like auto & home insurance… If we are accident-free, do we expect our agent to send back all our premium payments? Why would life insurance be any different?
        Term is supposed to run out. It’s designed to work alongside a financial plan towards retirement goals. The affordability allows us to save money so at a certain point, we have adequate assets to enjoy a long retirement and/or leave behind to beneficiaries. We don’t care how expensive life insurance is in our later years, if we have no need for it. Right?
        The bias whole life agents feel is probably a result of the guidance of Dave Ramsey & Suze Orman, among others:
        http://m.youtube.com/watch?v=gvjir8yxPUI
        http://m.youtube.com/watch?v=WzgtWfQngII
        Whole life is only appropriate for tax-sheltered growth after all other investment vehicles have been maxed out. Sadly, most are not contributing elsewhere. And their whole policy was sold as some a miraculous catch-all for dying too soon or living too long.

      • John,
        With you comment about whole life I agree but life insurance has come a long way and there are permanent insurance products with good returns, special tax advantages. I agree with Tim about term, 94% of the people never use it because it expires before the person expires. You want your life insurance policy in force when you die and you can have wonderful supplemental retirement if utilizing the proper permanent insurance (not whole life).
        Pam is also right but the properly structured life policy will include disability. Someone promoting an IRA other than a ROTH does not understand taxation and future social security issues. The proper permanent life insurance and ROTH iRA’s are the only products that address this.

  11. I have tried to get term life. I was turned down because I used to have a heart murmur. Even though it never required any treatment except antibiotics before dental work and cannot be heard except during pregnancy, I have been told that I could only buy term life at the cost of someone who would be in poor health. I’m not going to pay over $300 a month. It can be very frustrating.

    • Sandy, it really comes down to the carrier you go with. Not all life insurance carriers are the same.

      • I’ve had one tell me that and another one tell me they won’t give me life insurance at all. Both are major carriers.

  12. Life insurance protects the living! If you have any loved one that is financially dependent on you then you need to protect them with life insurance. It provides an instant estate of money that is income tax free to the beneficiary. We all have good intentions to put money away and save, but have some life insurance in place while you are doing it! Find an independent life insurance broker you trust, that is knowledgeable and has access to all the top rated carriers. They can shop and find you the best rate for which you are qualified for. I personally have helped many people secure life insurance. I believe listening to the need, educating and finding a life product that works is key! It could be term, universal or whole life. There is a time and place for each one. Often times it comes down to what you can comfortably afford each month in your budget.

    One of my favorite quotes out there and I am not sure who said it, but here it goes…..

    “The best life insurance to have is the one that is in force when you pass away.”

Add a comment

*