The Importance of Life Insurance
Jen and I have been quite involved in the Insurance scene over the last decade or more. Several of her family members have worked for NY Life and my father sold Insurance back when I was a wee lad. And full disclosure I spent 8 months of my life selling Insurance for NY Life as well till I decided that putting on a suit every day to talk to people about death and protecting their loved ones was not something I could do. It’s a hard sell to say the least.
With all that said I think Life Insurance is something EVERYONE needs.
Here’s why:
Parents should by their children permanent life insurance for two main reasons. First it guarantees their insurability. Most reputable insurance companies (NY Life, MetLife, State Farm, USAA etc) will have riders on the policy that state that the child can purchase additional levels of life insurance with no additional health checks. See kids have it easy. Since they are usually in fine health their insurance comes without a health check. And with this rider in place if they do ever contract something that would negate their insurability then they at least have a small policy in place that allows them to purchase additional life insurance.
For instance:
If a child named Bob has loving parents that have done their homework they will probably have purchased a small permanent life insurance policy on him. The smallest face value for permanent life insurance right now is usually $25-50k and will cost the parents somewhere in the neighborhood of $225-400 annually. Now let’s say Bob gets to age 9 and finds out he has cancer. No worries though as his cancer is operable and he will live a nice long life. But later in life Bob hits a trigger point built into his $50k permanent life insurance policy that allows him to purchase an additional $50k worth of insurance with no questions asked. He just checks a checkbox on the annual payment and Boom! He goes from 50k to 100k just like that and payments will go up slightly from $325 to $450 Annually. Say he does this a couple of times prior to his 30th birthday and has a total of $250k in Life Insurance. He ends up meeting a nice lady (Jane) that he falls in love with and they have kids. Because he is a responsible spouse and parent he meets with his agent to get additional life insurance to make sure his family is taken care of if he passes away only to find out that because he has a history of cancer and his cholesterol has been a bit elevated he cannot afford a new life insurance policy. Again, no worries as he has $250k currently and can purchase additional through that policy at similar triggers to what he has used before. Plus he is buying it at a lower rate than he would if he were to purchase it at his current age.
This brings up point number two for purchasing life insurance for kids. You are enabling them to purchase life insurance for the rest of their live’s at a lower rate. Life Insurance premiums are calculated by a number of factors including: Age, Health, Marital Status, Gender, Previous medical history, dangerous activities, credit history and more. The two biggest factors are age and health. So if you purchase insurance for a child at age 4 and they are assumed to be in perfect health then you are enabling them to purchase additional life insurance at a much lower rate in the future.
As for Parents you are in need of insurance as well. Most of the time you will have to buy Term Insurance though as costs will be prohibitive and your insurance needs are greater during certain portions of your life than others. You are purchasing insurance so that if something happens to you your spouse and children will be able to live the same life they live today. So you are in effect purchasing insurance to guarantee they have your income for as long as needed. If one spouse works by staying home with the kids then they will need insurance as well since if they pass away the spouse generating the income will have additional expenses of childcare and helper type expenses.
There are many reasons to have Life Insurance. It is not an ugly thing. It does not need to be morose. Life Insurance is really the a great act of love since you are saying ‘Even if I am not around I want you to be taken care of’ to your family. Think about it.
Finding a Life Insurance agent doesn’t have to be a difficult process either. There are some slime balls in the industry but for the most part Insurance People are knowledgable and are interested in making you wealthy. Many of them have licensing that means they handle investments as well. They know that the more money they can make you the more money they will make (at least the good ones). The first step is making sure you are protected by insuring the various aspects of your life (house, car, disability, health, life, etc). Then you can start to plan for investment. Insurance is first since if you have a large sum in investment and become disabled then you are going to eat through your investment portfolio to provide for you and your family. If you are insured for that aspect of your life, disability, then the insurance covers you and your investment is safe.
Anyway, if you have any additional questions just email… I get nothing from this other than knowing those that read this are a bit more knowledgable about the importance of insurance.
**** Additional Info: Someone just asked me on twitter if I am against the Dave Ramsey outlook on Life Insurance. I would say no. Life insurance as an investment is typically going to provide lower returns than the stock market or mutual funds when looked at long term. But I don’t think Dave Ramsey disagrees with life insurance. He tells people to purchase Term life insurance and invest the rest. I agree with that. I think everyone needs a little bit of Permanent life insurance as it is always going to cost something to bury you and it would be nice if those expenses were at least covered.
For adults I think Term is good enough. I would just look at term insurance that is going to cover you for the duration of time that you have till all of your kids are grown. And even then you may still need insurance if your investment portfolio is lackluster. By this I mean, if you are older 55+ and have no insurance and then pass away are your investments going to allow your stay at home spouse to live without having to subsist on Social Security only? If the answer is no then you may need Life Insurance later into life. And the premiums on Term insurance are RIDICULOUS once you get past 45. So while I typically agree with Dave Ramsey and have followed many of his principles this is one area that I think needs individual attention for each person and their family.
I will agree with his statement on the above link that Universal is typically not something that should be used. Universal Life Insurance is like permanent life insurance but it is tied to an investment portfolio (typically mutual funds). The idea is that you should see higher rate of return than permanent life insurance. But if you are wanting to invest then do it through a straight investment vehicle like an IRA or Mutual Fund or 401k where you do not have the overhead of handling fees and charges typically associated with life insurance.
If you are a diehard Ramsey-ite then his tenets may be true since you should be debt free by your 50s (or sooner) and have invested heavily so you have a nest egg for your loved ones. Reality is often different though.
