How to Acquire Life Insurance

What Is Life Insurance?

Life insurance is a tool for protecting your loved ones in the case of your death. The main purpose for having life insurance is to replace your income or financial value by allowing your family to receive a death benefit when you pass away.

Why This Is Important

A lack of adequate life insurance coverage can leave your family in a difficult position as they try to navigate their new financial life without your income or assets. This is especially important for families who have started building assets but don’t have enough to leave behind an estate for survivors in the case of death.

Once enough assets have been accumulated (usually in later years such as retirement), life insurance may no longer be necessary.

How to Acquire Life Insurance

When choosing life insurance, you have to determine:

1. What type of insurance
2. How much death benefit
3. How long you want coverage to last

Although there are various types of life insurance in the marketplace, we typically advise individuals to pay the least amount for coverage for the duration of time needed. This usually comes in the form of Term Insurance.

Types of Life Insurance

There are two main types of life insurance: temporary and permanent.

Term life insurance is a temporary policy that guarantees a set death benefit (also called face value) for a specified length of time (i.e. 20 years). Premiums are usually paid for that duration and there is no cash value accumulated.

Group life insurance is another form of temporary life insurance offered through employers. The premiums are generally inexpensive and the death benefit is a multiple of your salary.

Permanent life insurance policies include Cash Value, Whole life, Variable Life, and other forms of insurance products. These policies offer lifetime coverage with the option to accumulate cash value over time. However, most of these are high-commission products oversold to folks who typically don’t need more than standard Term Insurance.

We subscribe to Warren Buffet’s mindset of not getting into anything you don’t understand. Unfortunately many cash value policies are structured in complicated ways that are difficult for most people to fully understand. They are presented as investment vehicles, retirement plan alternatives, etc. Because of this complexity, among other reasons, we believe most individuals should purchase Term Insurance for their life insurance needs.

Common Life Insurance Questions

How Much Life Insurance Do I Need?

How much life insurance you need depends on several factors including:

• Age
• Income earning potential
• Amount of debt you have outstanding
• Number and age of dependents

A quick rule of thumb for the average dual income family in their late 30s with 2.2 children is that you should be insured for 10-15 times your annual income. So if you earn $65,000 a year, you might consider term insurance with a face value of $650,000.These numbers are hypothetical and individuals should consider their personal circumstances for the most appropriate face value amounts.

How Long Will I Need Life Insurance?

Again, this calculation depends on your specific circumstances. You typically want to have insurance coverage for as long as other individuals depend on you for income and you haven’t built up enough assets to replace your income stream.

For example, if you have three children that depend on your income, you should be insured until the youngest is old enough to become self-reliant.

What Is the Goal of Life Insurance?

The goal of life insurance is to leverage insurance company dollars for a death benefit while you build up assets to the point that coverage is no longer needed. It is prudent to pay minimum dollars for this coverage as it will only be temporary if your financial plan is structured properly.