Life insurance is not a common dinnertime conversation. You wouldn’t find Don Draper sitting in a restaurant with a cocktail professing how amazing life insurance is. It’s just not sexy. No one likes to talk about it, much less think about it. After all, life insurance is something that you only have to think about when you are old and gray, right?
Actually, there is nothing that could be further from the truth. Life Insurance is one of the oldest forms of insurance that still has significant value in any financial plan. In the right situation, it could be just as important as having a strong Emergency Fund, or funding your retirement.
Still need proof? Here are 6 compelling reasons why life insurance isn’t just for your parents.
Check out my podcast on the Different Flavors of Life Insurance.
Young and Healthy– Life insurance doesn’t pay out until you die out, but the best time to buy to it is when you are young and healthy. Life insurance is issued on a rating scale. The healthier you are, the better the rating. The better the rating, the lower the price. Super preferred; the best rating is reserved for those with good DNA who are in tip-top shape. Only 4% of the population actually gets approved at Super Preferred rates, but not to worry if you don’t, there are lots of other rating classes. Being young and healthy goes a long way when we’re talking life insurance.
Retirement Rocks– 401(k), IRA, ROTH, SEP-IRA – they are all great retirement options. These guys help you save money now, and maybe even save you a few bucks on your taxes, for promises of a much bigger pot once you retire. There are also hefty fees from these types of retirement accounts if you need to get your hands at the money while you are still working. If you take money out of your 401(k) or IRA before you are 59 1/2, not only is it counted as income for you, but you also are subject to a 10% penalty. Life Insurance is the yin to retirement accounts yang. There are two kinds of life insurance, those that expire (term), and those that generate cash value (permanent). If you structure a permanent life insurance policy properly, you can actually use the cash value during your life to help fund your retirement, and even better, the benefits can be tax-free to you.
We’re Married– Being single can have many benefits. However, after you say the “I do’s” it’s probably the best time to start thinking about life insurance. It’s quite common that one spouse will work while the other spouse might stay home. Or, maybe one spouse makes a lot more money than the other spouse. However you slice it, life insurance can provide a very valuable asset if something was to happen to one spouse. Once you get used to two incomes, it’s really hard to take one away without having to change your lifestyle. You want to make sure you have enough life insurance to cover all your expenses, and then some.
We’re Having a Baby– If you didn’t think getting married was a compelling reason enough, that little bundle of joy should surely spur on the need. Kids bring on a ton more expenses, many of which you haven’t planned for – daycare, education, clothes, food, and not to mention college, which could cost somewhere in the $200,000 range once they reach 18. Tax-free life insurance benefits can become a life preserver that many families need in the event of a tragedy when one parent passes away.
Open For Business- You’ve got a brilliant name, a rock star business concept and you are ready for world domination. If you’ve got a business partner, then life insurance should be your next step. Business partnerships are common when starting a business. You share expenses, knowledge and more. What happens when something happens to one business partner? It’s not so easy to just carry on without that person. You’ve also got their family, their business interest and the loss of a partner to think about. Business owners usually opt for life insurance on each other in what is a called a “Buy-Sell Agreement.” This agreement drafted by an attorney states who gets what when something happens. The most common form of currency to “fund” a buy-sell agreement…you guessed it, life insurance.
For the Long Haul- Longevity is a concept that is used a lot in the financial world, and basically it just means how long are you going to live. Your longevity matters because it will totally shape your financial plan. If you have good longevity in your family, meaning everyone has been healthy and died of natural causes, then most likely you will as well. If however you have a family history of cancer, or heart disease or any other grave disease, then you might not have as long of a life. Not to be down and discouraging, but it’s important for you to think about these things when you are young. It will help you shape your plan and maybe make some smart decisions along the way.
The question is always how much life insurance should you get, and how do you figure that out. Well, there are many different ways, but a popular one is called the Human Value method. This basically means that you take 8-10 times your income, which is your Human Value, and whatever number that is, that is how much life insurance you should purchase. We all have the power to make a lot of money over our lifetime, and life insurance provides our family with protection to reap those earnings “benefits” should something happen to us. Obviously someone that makes $50,000 might purchase a lot less than someone who makes $500,000. It’s not always this cut and dry, but it’s a good rule of thumb.
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Shannah Compton Game is a podcast host and CERTIFIED FINANCIAL PLANNER of the top-rated Millennial Money podcast. Millennial Money has over 6-million downloads in 164 countries. Shannah’s years of experience as a skilled Certified Financial Planner have set her on a mission to revolutionize how people think, act, and feel about their finances…and have some fun doing so.