This will be a short article, and honestly, rightfully so. For far too long, life insurance has been made overly complicated, expensive, highly-profitable to the selling company and advisor, and of little-to-no benefit to the consumer in most cases. When people hear “life insurance salesman” they tend to shy away. That’s why they started calling themselves financial advisors. Well, the title of financial advisor is starting to gain the same negative connotation. I expect them to change their title to something like “Personal Wealth Literacy Coach” or some other garbage in the near future. I digress – in reality, life insurance is designed to protect your loved ones when your time runs out and you ultimately meet the man upstairs.
Life insurance explained
For those of you that don’t know, life insurance is a product designed to protect your heirs in the event of your death. There are several types of life insurance, but for the sake of this article the only one we will discuss in-depth is term life insurance. In short, you pay a monthly (or yearly) premium for a guaranteed death benefit payable to your designated beneficiaries in the event of your death. This policy only pays out if the policy holder dies. Most of these policies are a set rate or “level term”, so the premium will never increase. These policies usually run in the 10-30 year term, meaning they will stay in force until death or until the end of the term, at which point, they will expire and be valueless.
Who needs life insurance
A lot of insurance salesmen will tell you that everyone needs life insurance. WRONG. This is incredibly, ridiculously, mischievously, wrong. A single 22 year old that just graduated college and started his first job with no debt does not need a life insurance policy. That individual needs to put $19,500 a year in his/her 401(k). Life insurance, like all other insurance, is based on need. You buy life insurance in order to protect someone, or multiple people, in the event of your death. This normally applies if you have a family with kids, however, it could also apply if you care for a parent or grandparent that has a long life expectancy. While reading this, ask yourself the question, “If I were to die today, would my death instill a financial burden on anyone?” If the answer is no, you likely don’t need life insurance. If the answer is yes, read on!
The justification
The obvious question is, “DC Poc, why would I pay $40 per month for 30 years when there is a fair chance I won’t die and the money will go to waste?” Well, I’ll answer the question in my own experience. I have a 20 year term policy that I pay $33 a month for. This policy will payout $1MM in the event of my death. If this occurs, my wife would be able to clear the mortgage, any expenses associated with my death, and still have $700k left over to invest toward retirement, likely filling the financial gap I left. Additionally, this would solidify my children going to college and having a great head start on being successful.
To me, this $33 a month is well-spent for the peace of mind that my family will be taken care of if I am taken from them. For my spouse, she pays $18 a month for a $500k policy with a 20 year term. In the event of her death, this would allow me to pay off the mortgage, have a little left over, and still continue to earn my normal salary which is a bit higher than hers. That is why her policy is lower than mine. Your situation could be different, or similar, but this is the justification we used while purchasing our coverage.
What terms are best for me?
First off, you should know that younger individuals will get the best rates. A 20 year old applying for a policy will have a far lower rate than a 40 year old. So, if possible, buy that policy as soon as you have a need. Additionally, your medical history will play a role in the rate. Insurance companies have different rate charts based on the “healthiness” of the individual applying for coverage. Just keep that in mind when you are currently healthy and decide to put off buying a policy for “just a couple more years”. Your rate may not be quite as attractive when that time comes.
Choosing a term and coverage amount is not difficult, it just appears that way. For us, we project to have investable assets that would greatly exceed the life insurance value at the 20 year mark, so that is what drove us to pick a 20 year term. As far as the coverage amount is concerned, we picked death benefits large enough to clear the mortgage, which is the largest debt for most people, and leave enough to safely replace the lost income. This is going to be different for everyone. Some people may go way over the top and get really expensive policies and this is fine. The goal is to ensure you are protecting the livelihood of your loved ones after you pass. If that can be accomplished, then you are on the right track.
What does it cost?
I can’t give you a specific number. There are a ton of factors that go into this, including term length, rating of the company, health rating, age, gender, etc. With that said, the chart below is provided courtesy of Value Penguin, and will give you a rough idea of what term life will cost you for a 20 year term with $500k of coverage.
Where to buy?
We haven’t really gone into many endorsements minus the occasional name drop of a few brokerages and Bogleheads.org. But in this case, I have a first-hand experience that I feel is relevant. I bought both of our policies through Term4Sale.com. This website was very easy to use, and populated a large list of top-rated companies with very competitive rates. For my wife and I, two separate companies offered better rates for each of us. Once you find a plan you are interested in, you select it and enter your information. This information will then be forwarded to a broker that sells the product you selected. This broker will compile all of the necessary paperwork, including medical screenings if necessary, and submit the application. Note, this broker may be out of state, as Term4Sale uses reputable brokers all over the United States. My broker was in San Diego and I live in the Southeast. After this is complete, you’ll be waiting for an acceptance from underwriting. That’s it!
What to avoid
Inevitably, someone will try to sell you a whole life, permanent life, universal life, universal indexed life, etc. policies. Avoid all of these. Unless you are an ultra-wealth individual (think $20MM+), these policies stand no chance of benefiting you. Another common selling point is to tell individuals with medical conditions that they will not qualify for term life. This isn’t always true and the best way to find out if you qualify is to apply. My wife has had high cholesterol since she was a young child, and yet, was still approved at the highest tier which is known as ‘super preferred’. Don’t give up before even trying.
While I understand that some people don’t like to think, much less talk about death, this is a necessary conversation for financial planning. The sooner you identify the need, and lock in a policy, the sooner you can sleep easy at night knowing your loved ones are protected. Like I said before, you can head over to Term4Sale.com and get some personalized quotes!