Life Insurance: Why Do You Think 1 Million Dollars Is A Lot Of Money?

I’m excited to take part in the life insurance movement with Good Financial Cents.  Having been a practitioner involved with life insurance over the past 21 years, I have unfortunately had to deliver my fair share of insurance checks.   When I met people who have lost a loved one and now have to build them a financial plan, never once did I hear them say, “Boy, I’m so angry my life insurance agent sold me too much insurance!”    Rather, I hear horror stories from widows who cannot understand why their husband didn’t take out more life insurance.   Or, they assured their spouse that they would be ‘well taken care of’ if anything happened to them.   This is the story for many families across America.

In the last six months, I’ve seen both friends and family who are in the 40 to 45 year old range dealing with major medical issues.   I’m 42 and when people told me about 10 years ago the aches in my joints would be just a little bit worse . . . well I hate to admit but they were correct.    Recently, I had three different people I know who drove themselves down to the emergency room thinking that they might be having a stroke or heart attack.    I know three different people who were diagnosed with some type of cancer that they are currently treating.    I also know of two separate cases where friends who found out they have diabetes.    In your 20’s, you never really had to worry about this kind of stuff.   In your 30’s you start to feel it a little bit here and there.   But, in your 40’s is where you start to see some of the more major stuff.

When it comes to life insurance, most people use some magical rule of thumb like buying 2 to 3 times their salary.  Even worse, since insurance is not most enjoyable financial planning topic, they come up with the notion that they will just pick up $250,000 or $500,000 and their partner will be alright if something should happen to them.    I’m here to tell you that when it comes to life insurance, $1,000,000 just isn’t a lot of money.

First of all, at today’s guaranteed interest rates, $1,000,000 will barely generate $10,000 per year of income if you don’t want to touch principal.  More realistically, it may only kick off $40,000 to $50,000 if you use a diversified bond portfolio.    However, if you go that route there is no guarantee that your principal won’t fluctuate.   Usually when someone passes away, liabilities have to be paid off.   If $250,000 is left on the mortgage, credit card debt, final and funeral expenses, and potentially putting away for your kid’s college education, you can blow through $1,000,000 in a country minute.    And . . . here is one more thought for you.  If you are 35 years old and buy $500,000 of life insurance for a 30 year term, about 20 years into that term (assuming inflation is 3%), the $500,000 will actually be only worth $250,000 in terms of real money.  Nobody who buys life insurance thinks about the impact of inflation on their insurance proceeds.

Here are a few other thoughts I have from a blog I wrote a couple of months ago . . .

  • WHATEVER AMOUNT YOU COME UP WITH INITIALLY, BOOST IT HIGHER-   A lot of Gen X’ers get their term insurance coverage through the workplace, and I think the trends show that many Gen X’ers will change jobs many times before they reach their final place of work.   You should not depend at ALL on the work place life insurance as part of what you need.    With outside coverage, many Gen X’ers arbitrarily buy something like $250,000 or $500,000 of life insurance to ‘cover the mortgage’.    I’m going to tell you that for most Gen X’ers, less than $1,000,000 is likely to little insurance, but for those of you with incomes over $100,000 a year, the life insurance number is more in the several million range than a flat $1,000,000

 

  • MAKE SURE YOUR TERM INSURANCE IS CONVERTIBLE  (for 10,20, or 30 years)- Insurance companies generally play on a bingo board.  What this means is that depending on your age, health, etc. there are particular companies that price their term insurance product to win that space.  If you buy term insurance, your insurance agent should be able to show you 5 to 10 different carriers.   If you are buying the term insurance product from a proprietary agent, odds are you aren’t getting the best deal and that is where they make their best commission.    Most of the level term insurance policies do have a clause that allows you to convert these to a permanent policy without evidence of insurability.  That’s the key part to the equation.   If your term insurance isn’t convertible, you could run the risk of becoming uninsurable down the road and still needing insurance coverage.

 

  • GET SOME TYPE OF PERMANENT POLICY – People avoid buying permanent insurance because they think it costs too much, they don’t understand it, or they read somewhere on the internet that it doesn’t make sense.    Suze Orman says so which must make it true.    With permanent insurance there are various types of product structures, cost structures, and companies that are engaged in selling these products.  You should do your homework to figure out which type makes the most sense for you, but what should be true for most of you in that early 40’s range is that getting some type of permanent policy will ensure you have insurance coverage for life.

 

Most people don’t go home at night or wake up in the morning thinking about how much life insurance they need.  Most people think that nothing is ever going to happen to them, but I think in your early 40’s you can start to see things happening to people around you as I have seen in the past six months.    Smart financial planning means not only looking at your overall financials, but assessing what types of coverages you will need at different ages in life.   Make sure to always consult an independent insurance agent who can represent many carriers or pay a fee-based insurance advisor to help guide you through this difficult maze of insurance decisions.    And remember that $1,000,000 just isn’t a lot of money.

Go to www.oXYGenFinancial.net to request a consultation with the leading experts for Generation X in the country.  We can help you by finding the right type and amount of insurance, and shop the market place for the best rates in the country.

Read about the importance of life insurance, and join us on Twitter @oXYGenFinancial with the hashtag #LifeAware.

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services

TED JENKIN IS SECURITIES LICENSED THROUGH INVESTACORP, INC. A REGISTERED BROKER/DEALER MEMBER FINRA, SIPC.ADVISORY SERVICES OFFERED THROUGH INVESTACORP ADVISORY SERVICES, INC. A SEC REGISTERED INVESTMENT ADVISORY FIRM. Linked sites are strictly provided as a courtesy. Investacorp, Inc., and its affiliates, do not guarantee, approve nor endorse the information or products available at these sites nor do links indicate any association with or endorsement of the linked sites by Investacorp, Inc. and its affiliates.

This post was published as part of the Life Insurance Movement.

About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin has spent the past 23 years giving personal financial advice to thousands of people across the United States. After graduating from Boston College in 1991, Ted spent more than 16 years working for American Express Financial Advisors/Ameriprise Financial. He was one of the youngest people in the history of the company to reach both Field Vice President and Group Vice President level. He managed more than 800 financial advisors throughout 8 states in his last position with the company. In 2008, Ted founded oXYGen Financial to help revolutionize the financial services industry by creating a new company that focused on serving the X and Y Generation. oXYGen Financial now has more than 2,200 clients throughout 25 states across the country many coming from social media techniques. Ted has been featured in over 30 magazines and newspapers including the Wall Street Journal, Business Week, and The Huffington Post. He was on the cover of Registered Rep magazine and featured in the ‘what will financial planning look like in 2023’ article done by Financial Planning Magazine. He has six advanced designations from the College for Financial Planning (CFP®, CRPC®, CRPS®, AWMA®, AAMS®, CMFC®) and is an on air radio personality.

6 Comments

  • August 22, 2012

    Fun stuff, Ted! I created a whole life “feel” with a term life policy.

    I got two whole life quotes and a bunch of term life quotes, took the term life and auto-invested 2/3 of the difference between the premiums into a mutual fund marked “Life Insurance Cash Value.” (I also paired it with a rock solid disability policy that I often forget to mention when I tell the story).

    I ran the numbers discounting the mutual fund by 2% from its historical term and there was no time between now and when I turn 65 (when I stopped running the numbers) where the whole life won out in both “if I die” or “if I don’t die” scenarios.

    Here’s to hoping thousands of people become insured today as a result of the movement!

  • August 27, 2012

    Ted, I saw your blog post title and had to read the post. I have 1.1 million in insurance and always felt like that was enough. I really sat down and figured out how much I really need to meet my financial goals. The number came out to almost 2 million dollars. I like what you said about no one ever complaining about selling them too much life insurance. With term rates being so low, there’s no good excuse not to have the right amount. I’m in the process of applyiing for a new policy now.

    Jared Balis

  • September 4, 2012

    Too many people put off the life insurance conversation. It’s not an easy thing to discuss, but you’ve got to think about what would happen (financially) to your family if you were no longer here. Life insurance can provide a strong safety net, and should go beyond merely covering funeral expenses. We’re going to be publishing results of a survey very soon about Americans and life insurance. Stay tuned.

  • September 17, 2012

    Jared,

    A lot of people don’t take into consideration the effect inflation has on their insurance. Think about this. If you buy 1 million of insurance today then in 20 years it will only be worth a half a million. I applaud you by being proactive and protecting your family.

  • September 17, 2012

    Nick,
    This is a great idea– and a nice strategy–great work!

  • September 17, 2012

    John,

    I look forward to the survey and thanks for getting more people in America to think about this important topic!

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