Unless You’re Already Financially Independent, You Really Need Life Insurance


leverageIf you’re reading this blog, you probably need life insurance.  I’m assuming that you’re reading this blog because you are in the middle class and you don’t want to be in the middle class all of your life.  You’re doing the smart things that none of your friends are doing, like buying used cars and eating in most nights so that you can set some money aside for investing.  You’re  also working hard at your job and trying to learn new skills to raise your paycheck so that you can invest more and reach financial independence.  You have also probably done the math and figured out that unless you and your spouse are both lawyers or doctors, you can actually net more money each year if one of you stays home, at least while the children are young because the costs of daycare, clothing, gas, and meals out quickly eats up the second paycheck.

But if you don’t have life insurance, you’re just a sad story waiting to happen.

Scenario 1:  Let’s say you’re the one with the job, bringing in the paycheck each week that you’re using to fund your quest for financial independence.  You have a young wife or husband at home and two beautiful children.  Your spouse has put his/her career on hold to raise the children and reduce your family costs so that you can reach financial independence.  This means that their resume is wasting away and they are missing out on all of the steps up the career ladder that he/she would have if he/she were in the workforce.

Let’s now say that you fall asleep coming home one night, run off the road, and hit a tree.  After the shock wears off from suddenly having you ripped out of their lives, your family will need to find a way to move on financially.  If you have adequate term life insurance, your husband/spouse cashes in the policy, invests the money split between bonds and stocks, and is able to continue raising the children.  They have shelter and clothing and food on the table.  They are able to go on vacations and live the kind of life that they would have if you were still there, at least financially.  When the kids are ready for college, there is enough money left over to send them there.  Your husband/wife may also use some of the investment money to add a degree for themselves to aid his/her transition back into the workforce.

If you don’t have life insurance, after the shock wears off, you family’s financial life is changed entirely.  Your spouse needs to get loans from family or go on welfare to pay for food and clothing.  They might need to sell the home and move into a small apartment, or possibly even end up on the street.  Your spouse’s financial judgement will probably be impaired during his/her grief, so he/she may run up credit cards to unsightly balances and run the family into bankruptcy.  Your spouse will need to get whatever job he/she can do, which will probably be a minimum wage job that pays no where near enough for childcare.  When college time comes, there will be no money available, so your children will either need to skip college or go as cheaply as possible.

Scenario 2:  Let’s now say that you’re the stay-at-home spouse.  You’re doing the really difficult job in the relationship, getting the kids ready in the morning, either being with them, teaching them all day or sending them to school, then helping out at the school.  You’re there for them when there are snow days, or when school lets out early, or when a child is sick and needs to come home at a moment’s notice.  You allow your spouse to stay at the office for the occasional late meeting and head out the door in the morning without needing to worry about getting the kids up and fed.  When your spouse goes on a business trip or off for training, you’re there to take care of the kids and the home.  You also take care of the thousand things your family needs to do like paying bills, getting groceries, cleaning the floors, meeting the repair man, and planning the summer vacation.

Now you slip and fall down the stairs and break your neck.  Obviously this causes a tremendous emotional shock to your family, but it can also greatly affect your spouse’s ability to provide for your children.  If you have adequate term life insurance, your spouse is able to find a live-in nanny to take care of the children and get them where they need to go during the day, leaving your spouse free to work normal hours and grow in his/her career.  He/she is also able to hire a cleaning service weekly to help with the deep cleaning of the home, and perhaps someone to help with things like errands because he/she has the additional income from investing the insurance money.

Without insurance, his/her whole life is turned around.  While in the middle of great grief, he or she needs to figure out some way to get the kids where they need to be and still get in enough hours at work.  He or she either needs to cut way back in lifestyle to get enough money for childcare or reduce the number of hours he/she works so that he is available to take care of the children if needed.  He/she may need to take a lower paying job to get the flexible hours needed.  Just as when the paycheck earner died, the family suffers greatly financially, affecting both your spouses life and that of your children.

You need life insurance, term insurance:  Term life insurance is extremely cheap because it doesn’t come with the gimmicks that whole life and other life insurance products do.  It just provides insurance for the rather unlikely chance that you will die during the term of the insurance.  You simply buy a policy for a specified period of years (the term).   The price (premium) will be based on when you buy it and the length of the term.  The amount you pay each year will be fixed until the term is done – for example, if your premium is $200 per year for a 20-year level term policy, it will be $200 per year from the year you buy it until the twenty year term runs out.  So long as you pay the premium each year, the price will stay the same and you’ll be covered no matter the medical conditions you develop later in life.  Get cancer at 35?  You’re covered and your family will be taken care of.

As an example of the prices you’ll see when shopping for term insurance, one insurance company advertisement I saw listed about $40 per month for a million dollar policy for a 20-year plan for a 25-year-old male.  A 25 year-old female was even less, perhaps $35 per month.  That’s less $500 per year for a million dollar’s worth of coverage – enough to pay off the mortgage and generate the income needed for your family to carry on without you.  The premium cost would increase to about $1000 per year if you wanted to buy another 20-year policy when the first policy term ended (when you were 45 years old), but if you’re saving and investing regularly, you won’t need to have life insurance anymore at that point because you’ll have enough money saved up to replace your income if needed.  Your home should also be paid off (you got a 15-year mortgage, you smart fellow).  Even then, it might be good to have a smaller policy – maybe a $250,000 policy – since insurance policies typically pay out quickly and provide needed cash to pay for things until the estate settles.

Before you get a smart phone with a data package, before you eat out this month, before you even order a pizza, get a term life insurance policy to cover your family.  You need a policy that is about 10 times your annual income for yourself and your spouse.  That will provide plenty of money to replace your income for a period of several years.  It’s really sad to hear about a family whose life is changed completely by an untimely death in any circumstance.  At least make sure your family is protected financially.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

3 comments

  1. I think you missed an important scenario here: if you don’t have any dependents, there’s no reason for life insurance. I know people who are single and living alone, financially suppprting only themselves, yet have life insurance since its what they are “suppose” to do.

    • You’re absolutely right and I did miss that scenario. The purpose of life insurance is to protect those who depend on you. If no one does, you don’t need anything more than maybe a $10,000 policy to bury you.

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