Do I Really Need to Buy Life Insurance?

The answer to this question is probably yes if you are 30 something, are growing your family or have recently bought a house and you really have not addressed your life insurance death benefit since you took your first job!!

Insurance, in general, is viewed as somewhat of a necessary evil, so many people avoid the subject altogether. It is one of those bills that, when you go to pay for it, you wonder what you really get for your money. Paying for auto or home insurance is a little more tangible to most people because we hear about car accidents or basements flooding every day. But life insurance? This is the type of insurance most folks hope they never have to use – live a long life and by the time you get to be 65 or 70 you have hopefully built enough wealth that your family will be fine when you do pass away. So why buy life insurance and even if you do, how much should you get and when should you purchase a policy?

If you do a respectable job of planning for you and your family, life insurance is like the warm protective blanket you pull up on a cold winter’s night. You have put a savings plan in place for things like education for your children and your own retirement. You have also hired an attorney to draft your wills and powers of attorney. Now all you need to do is protect your family just in case you get hit by the proverbial bus and then you can sleep soundly each night, knowing all will be well, even if you are not around.

So then, how does one decide what type of insurance to select, how much insurance you should buy, etc? The first thing to keep in mind is that life insurance planning is really planning for the catastrophic event. In other words, if you are not around, what is going to happen to your family financially? Let’s say Joe, age 34, and Sally, age 33, are married and have two children, ages 6 and 8. Below are the other salient points when it comes to calculating how much life insurance they might need:

Sally works hard as a stay-at-home mother while Joe works in a job that pays him $200,000/yr.
They have $300,000 in investable assets and have saved an additional $25,000 in each of their children’s respective 529 accounts.
They are planning to pay for the entirety of their kids’ college educations.
Their annual expenses are $100,000.
Sally is a teacher by education and, in her job prior to having children, she was making $50,000 per year.

Let’s tackle Sally first. While Sally is contributing mightily to the overall well-being of the household, she is not bringing in any income. If Sally were to die prematurely, Joe would need to be concerned with her burial costs as well as daycare costs for their young children. Burial costs will be somewhere between $10,000 and $20,000. Daycare will primarily be needed during the summertime since both of their kids are of school age, so the annual costs will not be overwhelming. A policy with a death benefit of $150,000 to $200,000 should suffice for Sally.

Joe’s situation is more complicated since he is the breadwinner of the family. If Joe were to die prematurely, the family would lose his $200,000 income. In this case, we would expect Sally to go back to work and earn the same wage she was earning prior to raising her children. Without getting overly detailed in this short blog, the calculation to determine how much life insurance to purchase on Joe’s life would include trying to cover the children’s education expenses as well as supporting the family on a yearly basis so they could maintain the same standard of living they were enjoying while Joe was around. An approximation of the death benefit would be in the $1.5 million to $2.0 million range. There is a boatload of life insurance calculators available online, but here is one that is easy to use.

Another key decision to make when considering the purchase of life insurance is the type of insurance. There are two primary types of insurance – term and permanent. The key differences are as follows:

An excellent and more detailed source of information regarding the differences between the two types of policies can be found here. Your choice will depend on your particular circumstances.

As far as the timing of the purchase of life insurance, the sooner you purchase a policy, the less expensive it will be. With every passing birthday, since your life expectancy is one year shorter, your potential life insurance premium will creep up a bit. Having said that, the need for life insurance becomes more apparent as your responsibilities and obligations grow. So, if you are young and single with little to no debt, you may not want to spend the money on an annual life insurance premium. But, if you are in a comparable situation to the one described at the beginning of this blog, you should act sooner rather than later.

Finally, it is always important to supplement the life insurance coverage you can get through your employer with a policy you purchase via an independent life insurance broker. Life insurance through your employer ends when you change jobs so having a separate policy protects you regardless of your career situation.

If you have questions and would like to talk with us further, please call us at 513-271-6777. For more THOR reading, click here to go to the Blogs and Market Updates section on our website.