One of our goals here at RichmondSavers.com is to make your life a little bit easier by reducing the complexity of the financial world down to something that’s simple and makes sense. There is no better example of that needless complexity than with the issue of life insurance.
Sure, there are many different types of life insurance and we could sit here and bore you to tears with a full rundown of every single option and what the pros and cons are. We’re not going to do that though because this is one of the most clear cut issues to us: If you have a family or people who rely on you, you absolutely should buy life insurance and it should always be term life insurance.
All the other kinds of life insurance exist solely to make the insurance company or insurance agent a whole lot of money through commissions and fees. This is why the vast majority of life insurance agents will start the conversation with how wonderful their “whole life” or “variable universal” policies are. They aren’t wonderful, they’re terrible. They will just make the agent wealthy and you less so, so of course they are going to try to sell you on them.
These policies try to combine an investment component with a standard life insurance contract. There’s no reasonable excuse to combine life insurance and investing as they are completely unrelated. Keep them separate so you don’t get clobbered with high fees and poor returns.
What is Term Life Insurance?
Term life is really just a simple bet between you and the insurance company. Not to be morbid, but you’re betting that you’re going to die during the term of the policy and they are betting that you won’t. You’re willing to pay them a certain amount of money each year to keep that policy in place just in case you do in fact die during the term of the policy, in which case your family will get a significant amount of money from the death benefit of the policy.
Here’s how it works:
- You buy a policy for a set number of years (the “term”). This period is usually between 10 and 30 years. You most commonly see 10, 20 or 30 year policies.
- You buy a certain amount of life insurance, for instance $500,000. This is the death benefit or the face value of the policy.
- You establish a beneficiary or beneficiaries of the policy who will be paid if you do die during the term of the insurance policy.
- Each year you pay the insurance company an agreed upon fee known as the insurance premium to keep the term life insurance contract in effect; with term life this annual premium stays exactly the same throughout the entire contract.
- The policy stays in effect until you either stop paying, you die, or the number of years of the term passes by and the contract ends naturally.
- If you stop paying or the contract’s term ends, then no money is paid out by the insurance company. If you die during the term and you’ve been paying the premiums to keep the policy active, then the insurance company will pay your beneficiaries the death benefit amount.
These policies can be incredibly inexpensive if you purchase them in your relatively younger years (late 20’s to 30’s), especially if you’re healthy. Laura and I each have policies for over $500,000 and they seriously cost us each about $400 per year.
That’s $400 I feel very good about spending, as it makes me feel better knowing if I get hit by a bus tomorrow that they’ll at least be covered financially for the foreseeable future. There’s a huge psychological satisfaction knowing you’ve taken this step to safeguard your family in case the worst happens.
Some Quick Tips on Buying Life Insurance
- Do not buy life insurance through your group policy at work and think you’re all set. What happens if you get fired when you’re 50 and you have to go out and buy life insurance on your own? You’re going to pay a fortune for it at that point! Jeff Rose, a Certified Financial Planner and founder of LifeInsuranceByJeff.com agrees. He adds, “I had a client in his late 40’s that had developed a fairly severe heart condition. He hated his job and wanted to quit badly. Unfortunately, he had his life insurance through his work and couldn’t get coverage anywhere else. With a wife and two kids, he was at the mercy of his employer and the life insurance coverage that they offered. He regrets immensely not taking my advice and buying a term policy outside his job.”
- Determine how much life insurance you really need, don’t just listen to the agent and follow along blindly. But also consider that it doesn’t cost all that much in premiums each year to add an extra $100,000 to the death benefit. We figured the death benefit would be more than enough to pay off the house, pay for college for both girls and then have money left over to deposit in the bank. That was a reasonable amount to us.
- If you have a spouse and/or children, you really should strongly consider getting one of these policies sooner rather than later. We first got our policies right before our oldest daughter was born in 2008 and we locked them in for 30 years until we’re nearly 60. At that point we should be financially set, the kids off to college, the house paid off and the need for this big lump sum would decrease dramatically.
- When you first sign up for this policy you’ll be asked to take a simple physical by the insurance company. Your weight is a significant aspect of the risk groups they assign, so if you’re thinking about losing weight in the near future, doing so before the physical is a great time! I asked my agent what I had to weigh to get the best rates and I made sure I fit into that bracket. This will save me money for the next 30 years!
Richmond Savers has partnered with CardRatings for our coverage of credit card products. Richmond Savers and CardRatings may receive a commission from card issuers.