Beating Broke

Personal Finance from the Broke Perspective

The Life Insurance Movement

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Much like the Roth IRA movement that I participated in a while back, Jeff from Good Financial Cents is spearheading a Life Insurance movement today.  The movement is designed to help educate people on the different types of life insurance, the ways to go about getting life insurance, and on how life insurance works, in general.

I’m sure we’ll see lots and lots of excellent articles to help educate the community.  If you want to check them out, Jeff has compiled a list of all the participants and posted them on the Life Insurance Movement homepage.

Where do I stand on life insurance?

I used to be on the fence.  On the one hand, there is a very strong argument for it.  On the other hand, it can be pretty draining on your finances, for something you don’t use (hopefully).

For a young person, struggling with debt and bills, that extra $50-$60 a month to cover my wife and I is a not insignificant chunk of money.  Neither of us is very old, and our probability of dying is pretty small.  So, why spend that money on something that we have no plan on using when it could just as easily go towards paying off some bill?  Maybe when we’re older, we thought, we’ll get ourselves some life insurance.  You know, when we can “afford” it.  I know there are quite a few of you out there who agree with that statement.

But, here’s the thing.  I buy car insurance to help pay for damages to my car should I get in an accident.  I’ve used that car insurance.  My wife and I are good drivers, and neither of us has been in an accident that has been directly our fault.  The few accidents we have been in have always been someone else’s fault.  We had very little control over whether we got into that accident or not.

Life insurance isn’t all that much unlike car insurance.  If car insurance only paid out if you were at fault in the accident, I’d never buy it.  After all, I have never been in an accident that was my fault.  Likewise, if life insurance only paid out if you died of natural causes, it wouldn’t make much sense, statistically, to purchase any before you were at least 45 years old.  But, we all know that people don’t just die of natural causes.  They die in all manner of accidents too.  And those accidents don’t just happen to people of a certain age.  So, it’s really the accidental, not-your-fault sort of death that you are insuring against.  And you have no control over that.  And, should you die as a result of one of those accidents, will your spouse and family be able to pay the bills?  Or, will they be forced to sell the house to pay for the funeral?  Do you really want them to have to make that decision if you die?

What kind of Life Insurance should I get?

There are basically two kinds of life insurance.  Term life, and whole life.  The difference is in how long the term of the insurance is, and how much the premiums are for the coverage level.  A whole life insurance policy is good for your whole life.  Because it’s good for your whole life, the premiums are usually higher for the coverages.  A term life insurance policy is only good for a set term.  It might be a 10-year term life policy, and be valid for 10 years from the purchase date.  At the end of the 10 years, you have to purchase a new plan.  When you are young, the term life policies have much cheaper premiums because, statistically, you aren’t very likely to die young, and so, the chances of having to pay out on the plan is pretty small.  When you renew after the 10 years, the new plan would be based on your age at the time, and would be slightly more expensive because of a higher probability of death.

I can’t really tell you which is the best for you, though.  It’s something that you, and maybe a good financial planner, should look very hard at.  You need to educate yourself on the different types too!  Really do your research, and don’t be misled by Colonial Penn’s “affordable” insurance, for example, look for a reputable life insurance company, that offers everything you and your family might need. I encourage you to click that link above, take a look at all the articles that are part of the life insurance movement, and find out as much as you can about life insurance.  Being educated on the subject will make it easier for you to spot bad policies, and find one that will fit your financial needs.

How much life insurance do I need?

Clearly, we’d all like to have a life insurance policy of several million dollars.  Some amount that would set our family up to never have to worry about money again should we die.  In reality, that just isn’t usually possible.  As the amount of the policy goes up, so do the premiums you pay to keep the policy.  What you really want is a policy that will pay out enough to make the transition from a two person led household, to a one person led household.

  • If you’re single, a policy that would pay off your debt, and pay for the funeral is likely enough.
  • If you’re married, with no children, a policy that can pay off the debt, the funeral, and replace your salary for a couple of years is a good policy.
  • If you’re married, with children, a policy that can pay off the debt, the funeral, and replace 5-10 years of your salary with some left over is an excellent idea.

Obviously, all of that is partially determined by what size policy you can afford.  By “afford”, I don’t mean afford in the way you likely do.  I don’t mean, after you’ve eaten out several times in the month, how much money is left over to buy life insurance.  I mean, it should be included in your budget, just like car insurance, your mortgage, and your utility bills.  When all of that, plus your life insurance premium is paid, you still need to be able to keep your bills current, and buy food to stock the refrigerator.  That kind of “afford”.

In the end, when you go and read all the other articles that are part of the life insurance movement, you’ll likely find several viewpoints that clash with mine.  You’ll find people who think that whole life insurance is better than term life insurance.  You’ll even find people who don’t think you need life insurance at all.  I think the important part is that you think about life insurance, learn about life insurance, and then make the decision yourself (preferably with help) on whether you want life insurance, what kind of life insurance you want, and how much you want the policy to be.

Tip: Check with your employer.  Some companies are offering life insurance to their employees.

For me, I think that life insurance of some sort should be mandatory, just like car insurance.  There should be state required minimums that you have to carry.  Far too many people are leaving behind families without any sort of coverage at all.  Even if it’s a small policy that can cover funeral expenses, that’s better than nothing at all, and you can increase it later too!