Are You Worth More Dead Than Alive?

how much life insuranceWe often buy life insurance because we’ve been told we should, but we don’t always understand exactly why or if we really need it.

Nor do we know how much insurance is right.

We create arbitrary values; “If I die I want to pay off the mortgage.”

Why should your mortgage be paid off if you’re dead, but not when you’re alive?

There is a lot of misinformation spread about life insurance. Many of those myths are spread by the people who sell it.

Rarely do people get insurance advice from someone not peddling it. 

In many cases, insurance policies are complex by design. That’s how they hide fees and convince you to buy products you don’t need.

Today, I’m going to simplify life insurance, dispel myths, and save you money. If there is anyone who depends on you for money, or if you depend on someone else for money, read this.

Who Needs Life Insurance

You probably need life insurance if your spouse, kids, or other family members depend on you for income.

For an example, let’s assume you have a family of four—Mom, Dad, and two little monsters under five. Dad is the primary wage earner and earns $5,000 a month. Mom works full time at home taking care of the little ones.

At first glance, Mom and the two kids are dependent on Dad’s income and he probably needs a life insurance policy.

You may also need a life insurance in certain business relationships which I will explain shortly.

If it turns out you don’t need life insurance, get rid of it and do something else with the money.

What is Life Insurance For

If you retain only one thing from this article, remember this: life insurance is a tool to replace income after death—it should NOT be an investment.

That’s it. Don’t over complicate it.

There are better places to invest your money that will give you more flexibility at less expense.

Do not use life insurance to pay off the mortgage.

Do not use life insurance to give your kids a pot of money.

Do not make yourself worth more dead than alive. 

Who Else Needs Life Insurance

In the example above, life insurance isn’t just for Dad. Mom might need it too. Even though she does not earn income per say, she does provide a service that has a monetary value.

If she passed away, Dad would not be able take over the childcare duties and continue to earn income. He would have to hire a nanny or babysitter. This expense could be covered with life insurance.

Insurance for Kids

I’ve yet to hear one logical reason why kids should have life insurance. Remember the rule, life insurance replaces income.

Unless your child is Miley Cyrus, earning more than mom and dad, save your money

Insurance for Business Owners

Life insurance isn’t always for Mom, Dad, and the kids.

Michael Jackson’s producer bought a $17.5 million dollar life insurance policy to cover his expected income from his comeback tour.

This type of business policy was not a gamble on Jackson’s life, or to profit from his death, but instead to protect the investors who fronted the substantial tour expenses.

Types of Life Insurance

There are essentially two types of life insurance—Term insurance and everything else. That’s an oversimplification, but the point of this article is to cut through the clutter and give you the essentials.

Term insurance is simple.

Simple is good. Complicated is how people make money at your expense.

With a term policy you pay a fixed fee each year for a set number of years. If you die during that time, your beneficiary(s) receive a preset amount of money, either once or in payments. If you do not die during that time, you and your beneficiaries receive nothing.

Let’s continue. Assume our example family does some math. Based on income, expenses and savings, Dad needs a $500,000 policy for the next twenty years. (These are not actual numbers. Do not assume this is true for you)

Dad is young and healthy and locks in a half-million dollar policy with a fixed annual fee of $220. Each year, for the next twenty, Dad pays a $220 premium. If he dies during that time, Mom gets $500,000. If Dad does not pass during that time, they receive nothing.

Why the fixed term?

Life insurance rates are calculated based on your age and health conditions. If you’re a higher risk insurance will be more expensive.

Young people are less risky than older folks, so rates are adjusted accordingly. When you’re young and healthy, insurance will be less expensive than when you’re older.

Smokers, for example, always pay higher rates than non-smokers. Statistically they have a greater chance of dying young.

The benefit of locking into a longer term policy is that you guarantee rates from when you are young, healthy, and insurable. Once you have a term policy, you are locked in, regardless of future medical conditions.

Not everyone is insurable—at least not affordably. If you contract a terminal illness, you will not find an insurance company to cover you at an affordable rate. That’s why it’s so important to get life insurance BEFORE you think you need it—and then never miss a payment.

You never know what tomorrow will bring. It’s too easy to put this off until it’s too late.

How Much Life Insurance Do You Need

People who sell life insurance typically receive a commission based on the amount of insurance they sell. With this fee structure, even a very honest salesman’s goals are not perfectly aligned with yours.

The salesman will receive more income the more insurance he sells. You on the other hand, will save money on premiums the less insurance you buy.

Step 1.

When deciding how much coverage you need, begin with the length of time you will probably need it. A good starting point is the age of your kids and how long you intend to support them.

Many families plan to support their kids to eighteen. If you plan to support them through college it may be their early twenties. There is no right or wrong answer. These are family value questions.

Step 2.

A second factor is the date your financially dependent spouse plans to retire. If you’re relying on Social Security, which hopefully you are not, then those ages are determined by law.

Retirement age may be based on pension or IRA rules, so it’s important to understand them. There are many variables, but you must these discussions and plan your life insurance accordingly.

For the very tiny percentage of the population that will need insurance coverage for much longer than average, then other non-term policies MAY make sense.

For example, a child with a serious mental impairment may make him financially dependent his entire life. These and other permanent needs are the only time you should consider the other insurance policies I haven’t mentioned.

Step 3.

Next discuss any large expenses you plan to incur during these years. College, weddings, etc.

College expenses can range from zero support, living at home during community college, to medical school at an Ivy League university.

Will you pay a portion, all, or none of it? Again, these are family value decisions and you can forecast and estimate the price tag.

Step 4.

Finally, estimate your current and future income, expense, and saving expectations. After you estimate these numbers you can put a single dollar value on the cost of your future income needs should you die early.

The math can be somewhat complicated when you factor in estimated investment returns and inflation. It’s worth paying a Fee-Only financial advisor to help you work through some of these decisions.

Don’t be cheap. The little cost more than pays for itself when you get the right coverage and don’t have to worry about it being over sold an inappropriate policy.

Finally, when in doubt, round up. It doesn’t cost much to move up to the next bracket versus what it would cost if your family came up short if they needed it.

How to Pick Life Insurance

After you know your insurance needs, the next step is to pick the best policy.

Don’t rush out and buy cheap term life insurance. Nor do you want to buy the most expensive coverage you can afford. The key is to buy as much of the right kind of coverage as you need. Not more—not less.

Life insurance is something you will need many years into the future, long after you’ve forgotten about your policy. You need an insurance company that is likely to be there when you need them.

There are no guarantees in life, but to improve your odds, look for a company with higher ratings. Life Insurance company ratings are not perfect, but it does help narrow the list. Check out my friend Jeff Rose’s site for a detail listing of insurance ratings. His Life Insurance Movement is also what inspired me to write this, so be sure to visit and say I sent you.

You can use online tools to search for quotes and get a rough idea of what your rates will be, however, I prefer to work with a good insurance broker I can talk to. A broker will be able to shop various companies and find the best policy for your family.

An agent, however, is different from a broker. An agent works for one company and will only shop their policy. A broker is able to shop various policies and often knows the pros and cons of different companies.

Each company has subtle differences in their underwriting. It helps to have an experienced broker who knows these nuances as it will often save you money.

For example, my mother passed away from breast cancer at a relatively young age. Knowing this information in advance helped my broker shop for a company where this would not affect my insurance rates.

The Application

When you’re applying for life insurance, be completely honest with your broker. Don’t lie about a tobacco use or your closet sky diving fetish.

The application questions may surprise you, but they are used to determine your risk level. Answering yes to questions does not automatically disqualify you, but it helps the broker find the best fit.

Be prepared. They will do blood work that is more detailed than your doctor’s physical. It’s not worth lying to save a few bucks and then have the policy disqualified when you need it. 

Oh, and ladies, it’s OK to stretch the truth about your age everywhere but here :)

Final Words

Read the fine print.

Do NOT buy anything you do not completely understand.

What’s in the contract is what you get, regardless of what you’re told.

Do not assume the people who sell insurance understand what they’re selling.

I’ve written about death before–it’s is a sensitive topic. It’s easy to get caught up in emotions. When choosing life insurance strive to make mathematical decisions rather than emotional ones.

You have a responsibility to those who love you.

Don’t put it off.

Get this done today.

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14 Responses to Are You Worth More Dead Than Alive?

  1. Marla Mac says:

    Chuck, great article on insurance. Thanks for making it simple for readers, and keeping it real. As a money coach and “impartial third party” that doesn’t sell investment and insurance products (I provide coaching and education), I admire people in the field that do right by their audience. I’m constantly dispelling the personal finance myths that my clients believe.

    There is too much convoluted information out there about insurance… as you said, most people giving out insurance advice are selling it!

  2. Nice post Chuck. A real “how to” for your readers.

  3. This is definitely a high quality post Chuck. I like seeing writers who aren’t afraid to be honest with their readers.

  4. David Meyers says:

    Nice job Chuck. Straight shooting. It echoes many things I tell clients on a regular basis. While the greater sin may be not having enough life insurance, having too much (or the wrong kind!) have real, sometimes extremely high, costs.

    I especially like where you point out how much of this is not as easy as a simple formula but rather a family value decision.

    Thanks for posting it.

  5. Angela says:

    Really good information Chuck. I’ve tried to convince my extended family and others to get term, but they’re set on whole life insurance. I leaned towards term after researching in the past. Great analysis as always.

    • Chuck Rylant says:

      It’s frustrating when people are stuck in their ways without rational reason, but in the end, you can only help those who want it.

  6. Mandy says:

    When I’m talking insurance with friends I try to remind then their kids are little liabilities. I never recommend insurance, but if they are insistent I recommend a very basic coverage to cover the funeral and burial costs.

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  8. Enrique Rensberger says:

    Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion..':..

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  9. I’m confused as to why so many people, especially the elderly, have life insurance policies. Life insurance is meant to replace your income for people who rely on it. If you are retired and your children have grown, why on earth would you have life insurance? The most I could see is a $10,000 to cover a funeral, but that’s about it.

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