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