You may be wondering whether having life insurance is necessary. Most of the insurance products that we purchase are policies that are required of us. Legally, we must have auto insurance if we own a car. We cannot get a mortgage without showing proof of homeowner insurance. We are unable to set foot on a job site if we don’t have business insurance and workers’ comp.
Life insurance is a different animal. For the most part, life insurance is not a requirement. That, in and of itself, is enough to keep a lot of people from buying it. In addition, the idea of thinking about one’s mortality is not something that gets people overly excited. Finally, once you buy life insurance, you don’t receive anything tangible except a few pieces of paper, which you then put in the closet with the hope of never taking it out again.
For these reasons, less than half of US households have life insurance (source: LIMRA’s 2016 Trends in Life Insurance Ownership study). Ironically, of those that do have it, 40 percent don’t think they have enough (source: 2011 Genworth LifeJacket Study).
“Thinking about one’s mortality is not something
that gets people overly excited.”
With so much going against life insurance, why in the world should you get it? Let me present three reasons:
First, as much as we may not want to admit it, the only sure thing in life (other than taxes) is death. We may go our whole driving career without having an accident. We may spend the rest of our days in our home and never have a homeowner claim. However, we all are going to die at some point. With this sure thing ahead of us, shouldn’t we have something in place to ensure our loved ones will be taken care of when it does happen?
Second, you probably don’t have enough money set aside to take care of your family without it. If you are the bread winner for your family, think about how long your bank account would last if you died tomorrow and no longer provided that income. An average life insurance policy ranges from $300,000 to $1 million. Very few people have that much money sitting around, waiting to be handed out to a spouse and/or dependents.
Finally, no other financial vehicle out there allows you to distribute this amount of money tax free. When you die, Uncle Sam will do what he can to tax your assets. If you have a life insurance policy for $1 million, your beneficiary will get $1 million.
“No other financial vehicle out there allows you
to distribute this amount of money tax free.”
If you are now ready to get life insurance, the next question would be: how much should I get? The rule-of-thumb answer is to take your annual salary and multiply it by 7 to 10. So if you make $100,000 a year, you could look at a policy between $700,000 and $1 million. The other option would be to evaluate how much you make as well as how much you owe on your mortgage, along with any other debt. Then add that amount to how much you want to set aside to pay for your child’s college education.
My advice is to take all three reasons into consideration when weighing whether to make the move toward life insurance. For more good information on how much life insurance you need, watch this video from Financial Design Studio.
by Ryan Delp, CIC