Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Let’s face it – dealing with life insurance is a drag. Just thinking about it makes you ponder some unpleasant possibilities, and insurance sales pitches are the definition of boring. Plus, who wants to write a check every month for something they hope they never use?
Yes, life insurance is a drag – until it pays off. In truth, insurance is a powerful, essential financial planning tool for most people. A CFP® professional can help assess your insurance needs and recommend policies that meet them. Among the issues to be addressed when considering life insurance:
Do you need life insurance?
Maybe not. If you have no dependents, life insurance is optional.
But if you have a family that counts on your income, life insurance is a must-have. You won’t really understand this until you have children. I remember racing to get a policy signed before the first big trip I took after my first son was born. I didn’t want to get on an airplane until I knew my family’s financial future was protected.
How much insurance do you need?
Your life insurance benefits should replace 100% of your income for at least as long as you plan to work. If you are 30, and expect to retire at 65, you need a policy that will replace 35 years’ worth of earnings. Here’s a simple rule of thumb to calculate the amount of insurance you may need: Take your annual income and multiply it by 18. Example: Let’s say your income is $50,000, multiply that by 18, and you get $900,000. This is a good place to start.
HINT: You may also want to add any significant debts to this number that you would like your family to be able to pay off, i.e. the mortgage balance or the future cost of education. Check bankrate.com for a good online tool (click “Insurance” at top of page for list of resources).
What type of policy should you buy?
TERM! Term insurance is simple and straight-forward. You decide on an amount and how long the coverage should last. Typical intervals are 10, 20 or 30 years. Term is the least expensive type of life insurance, especially if you buy it early. The cost of term coverage goes up every year that you wait to purchase a policy.
Ask your agent about a “renewable” term insurance policy. Such a policy may allow you to maintain coverage if you suffer a life-threatening illness when the original policy is coming to an end.
Where should you buy your policy?
It’s easy to purchase insurance online. But because life insurance is such an important financial tool for your family, I think you should sit down with a reputable life insurance professional. Ask your friends, neighbors or co-workers for referrals. Stick with highly rated life insurance companies.
What should you avoid?
Don’t buy “mortgage life insurance.” Such policies protect the mortgage company, not your family.
Never buy “whole life insurance.” Salesmen pitch these policies as an investment, but they are expensive and not efficient for investors. You will do better purchasing inexpensive term insurance and investing what you save in premiums on a good dividend-paying stock index fund, such as the Vanguard Dividend Appreciation Index Fund.
– by Wes Moss, Atlanta Bargain Hunter