When I say “life insurance salesman,” what image comes to your mind? Probably nothing positive. I spent a short part of my career selling life insurance and it was miserable. Why?
- Nobody wants to buy life insurance.
- Buying life insurance forces you to think about your own death.
- The application process is difficult and complicated.
- Once you get your life insurance, you never want to see your agent ever again. If you do, it probably means you’re dead.
I have great respect for those sales warriors out there who tirelessly get people to insure their own life. It is a thankless job, but incredibly important. Without getting nudged along, most people will never obtain it, and the consequences could be devastating.
Whenever someone dies, it is deemed inappropriate to ask, “Did he/she have life insurance?” But for many people the answer to this question could change the rest of their lives.
If a mother is at home raising three children, and her husband, who was making $70,000 a year, were to die, she is suddenly in a dire situation. I can’t emphasize this enough. She could go from a normal life to a life of poverty.
So before I get into the details of various kinds of life insurance and their uses….
If you have a child younger than twenty one, you need life insurance on the life of both parents. Period. End of story. It is remarkably irresponsible to live without this safety net. If you have grandchildren, call their parents right now and make sure they are protected.
If you are home raising children, your death would put a financial strain on the household as the children would need care going forward. You still need life insurance even if you are not making an income.
How much insurance do you need? If you are making $50,000 a year, you need to get enough insurance to reproduce your income. Remember it’s appropriate to withdraw 5% from your portfolio of stocks and bonds each year. If you die, the life insurance needs to be able to replace your income.
So if you make $50,000 you need $1,000,000 of insurance. You take the million bucks, invest it, and take your yearly distribution of $50,000. It might seem like a big number, but it’s just simple math. We will talk soon about how remarkably inexpensive life insurance can be.
There are basically two kinds of life insurance. The kind that lasts forever and the kind that lasts for a limited term. The “lasts forever” kind is far more expensive. With this kind of insurance, the insurance company knows that, at some point in time, they will have to pay up. Unless you live forever.
The far more popular “term insurance” is, in my estimation, the answer 98% of the time. Term insurance is simple.
$100,000 of 20-Year Term Life Insurance = If you die during the first 20 years the company pays $100,000 tax free. If you live longer, the policy ends.
This kind of insurance is far cheaper because most of the time the insurance company doesn’t have to pay anything. The term ends before you die.
To give you an idea of how inexpensive these policies are:
- A healthy 25 year old man can get a $1,000,000 policy for twenty years for $40/mo. (How could young parents not buy these policies?)
- A healthy 30 year old woman can get a $1,000,000 policy for twenty years for $30/mo (it’s cheaper because women live longer).
- A 50 year old man can get a $1,000,000 policy for twenty years for $150/mo. The insurance company starts to get a little nervous that you will die during the twenty year period.
- A 70 year old man can get a $1,000,000 policy for twenty years for $2000/mo. Now the company is really afraid that you’ll die during the term.
Whenever you buy life insurance, you have to go through an underwriting process. This is where the insurance company checks you over. You will have to turn over medical records, and someone will come out to your house to take blood, urine, and other vital statistics.
These examples above all assume you are in good health. If you have pre existing conditions the price could double or triple. In fact, many people can’t qualify at all. If you’ve had cancer, a heart attack, or a stroke, you might never be able to get insured.
When should I buy whole life insurance? (the kind that lasts forever)
I can find very few instances where this is appropriate.
- You have a special needs child who will always have to rely on you for financial support.
- You have a much younger spouse. They will need help if you were to die, as they could possibly live another thirty years.
- If you are incredibly wealthy you might need life insurance for estate tax purposes.
- I can’t think of anything else.
Do I need life insurance once I’m retired?
This is a tricky question. The reality is that most retirees can’t afford it, and many cannot even qualify. The only rationale for needing life insurance in retirement is based on the fact that you will lose a Social Security check in the event of death.
In a perfect world it would be a good idea to have some life insurance in retirement. But you are betting on the fact that one of you will far outlive the other. It is an almost impossible calculation. Generally speaking most retirees are not insured.
Should I get a “burial policy?”
Probably not. Don’t think you can buy a policy while on death’s door. The insurance companies aren’t that dumb. These small policies are often so expensive that you would be better off taking those payments, sticking them in a bank account, and use that upon your death to pay expenses.
My insurance salesman wants me to buy a:
Universal life policy
Whole life policy
Variable universal life policy
Equity indexed universal life policy
Confused yet? Again these permanent policies apply to very few people. It is common practice for life insurance salesmen to try to shoehorn these options into your situation.
A life insurance salesman told me that I can use life insurance to protect my life and fund my retirement. Is that a good idea?
Don’t do that.
I saw a commercial on TV that says I can sell my life insurance policy. Is that a good idea?
No. It is a borderline scam.
The bottom line to all of this is:
If someone is financially dependent on you, you need life insurance. Don’t make this more complicated than it is. Now go out and get those grandkids protected.