What kind of life insurance should I get?
Life insurance has two types that can be chosen from:
Insurance protection for a period of time (usually 5/10/15/30 years)
Cash Value Life Insurance
Insurance protection that is permanent and typically contains savings elements
Forms of CV Life Insurance:
Whole Life – provides protection for your whole life. It also provides a table of guaranteed cash values. Owner can surrender at any time and cash value minus surrender charges and any outstanding loans will be refunded. Cash value should equal the face amount of the policy when the insured reaches the endowment age or the last age on the mortality table used to calculate that policies premium.
Variable Life – cash invested in stocks, mutual funds, and ETFs with no guarantees and fixed premiums.
Universal Life – Unbundled protection with flexible premium with ability to withdraw.
Variable Universal Life – Same typical universal life policy with no guarantees of return because of investing in stocks, mutual funds, and ETFs.
A real life story about Life Insurance
This is a true story about life insurance, although I have obviously changed the names to protect the person’s privacy.
It was Sunday morning. Jim and Betty were outside, on the driveway of their modest home. They were washing the car. Jim was washing one side, Betty was washing the other. Betty was talking to Jim, but all of a sudden she noticed he wasn’t on the side.
She walked around the back of the car and there he lay on the ground, dead from a massive heart attack. I met with Betty a week after the funeral to complete the paperwork to file a claim for the $50,000 of life insurance. It was quite a sad time and Betty was still very upset. She sat in my office and cried.
Greif Counselors have told me that in cases of sudden deaths like Jim’s unexpected heart attack, the grieving process can take a lot longer. Betty was facing two problems. First, she was too upset to go back to work. Second she had financial obligations including the house payment and now she only had one paycheck to cover all the bills.
The life insurance helped with both problems. Betty took three months off from work and used part of the life insurance proceeds to replace her salary. Betty used the rest of the life insurance money to pay down the mortgage so could have lower monthly payments that would be within her one paycheck budget.
Betty told me that without the life insurance, she would have been financially ruined. Of course, she wished that they had purchased a bigger life insurance policy, but at least she had enough money to see her through the difficult times.
How much Life insurance do I need?
If you asked 100 different financial planners or life insurance agents how much life insurance is enough, you will get 100 different answers. There are some “rules of thumb” for selecting how much life insurance you need. A common rule of thumb is seven times your annual income.
When working with clients on deciding how much life insurance they need, I like to start with the minimum amount they should buy. The minimum amount of life insurance should be the amount necessary to pay off all of your debt (mortgage, car loans, credit cards, student loans, etc.) plus funeral costs plus 3 months’ salary for your spouse.