Special note: this blog entry is part of a movement to raise awareness of the importance of life insurance. Today, August 22, over 100 bloggers and members of the financial media, will do their part to improve the financial lives of many members of the blogosphere and beyond. Please consider checking out some of the other posts by searching on the hash tag #LifeAware on twitter, or go see Jeff Rose, Movement Conceiver.
Much like Jeff Rose, originator of the Life Insurance Movement, I’ve had a number of clients over the past few months who have lost a spouse and have come to me for help with getting their finances in order. Fortunately, they were all recipients of life insurance proceeds. More poignant for me is the fact that premature death brings with it so many difficult non-financial implications that adding unnecessary financial burden on top of that is almost inconceivable. But it happens. A lot.
According to a recent study by industry group LIMRA, the percentage of households in the US that are covered by life insurance recently hit its lowest point in 50 years. The most common reason given was that it wasn’t a financial priority. Fair enough. But what if something happens to the income generator(s) in the household? It will be too late to prioritize life insurance then.
Waiting until you’ve got a serious illness to buy life insurance is not a strategy!
Indeed, the most vulnerable households appear to be those that are most in need of insurance. Although the rate is dropping, LIMRA estimates that 90% of all husband-wife families with kids under 18 had some life insurance coverage in 2004. The rate among all households is considerably lower. Furthermore, many covered households only have insurance through their employer. In fact, only 44% of all households have any life insurance outside of employer-sponsored plans.
What about the life insurance I have through my employer?
Although life insurance through your employer is a nice supplement, there are two problems with relying solely on that. The first is that job security is clearly not what it used to be. While some group policies may be portable in the sense that you can convert them to an individual policy without enduring a health review if you terminate with the employer, the rate you will pay on the new policy is likely to be high. Higher than you could get buying an individual policy on the open market if you’re reasonably healthy. In other words, the coverage you receive is probably fine…as long as you’re working for that employer.
The other problem with relying solely on your employer is that the level of insurance provided is probably not enough to cover your needs. For non-executives, employer-provided coverage comes in a number of different flavors. Some employers provide a flat $50k, some provide 1x or even 2x salary without asking you to pay an additional premium. Here’s the problem…if your income is critical to the bills getting paid at home, how far do you think 2x salary will go? There are a lot of factors to consider, but taken simply, if you’re living somewhat below your means, let’s say that money will last between 2-3 years.
How much do I need?
So how much do you really need? Again, that depends on a number of variables. If you’re a parent of triplets who will attend college in the next eighteen years, and you intend to help pay for college tuition, your need is greater than if it’s just you and your spouse. If you have a significant mortgage remaining on your home, you’ll probably want to relieve your family of that burden if your income disappears. You get the idea.
You’ll often hear about rules of thumb, such as 10x or 20x your income. It’s not that simple, because you should be thinking about covering expenses rather than replacing all of your income. Consider this, though: if you earn $80k per year and bring home $60k after tax, and you carry $800k in life insurance, your beneficiary will have to earn 7.5% on those proceeds to replace your salary without considering inflation. That’s a gross over-simplification, but hopefully it makes the point.
Shady sales tactics
To be sure, life insurance has gotten a bad rap in many circles, in some cases for good reason. There are some unscrupulous life insurance salespeople roaming the earth. In fact, studies have concluded that such tactics are partially to blame for the falloff in life insurance coverage. You’ve got to get over that…there are shady car salesmen out there as well, and we’re still buying cars, right? Take it from somebody who does not earn a commission on the sale of any financial products: you (probably) need life insurance.
If you’re not being targeted by life insurance agents, which some feel is another reason for the drop in coverage, so much the better. I feel it’s always better to initiate a purchase decision on your own. Make your selection based on your own research, rather than the sales tactics of a salesperson who has targeted you for his or her product.
The time is now
Regardless of how you go about it, if you have somebody relying on your income, now is the time to get life insurance. Just do it. If you’re not sure how to buy it, or how much to buy, I recommend working with a fee-only planner, who will work commission-free and will not have an incentive to sell you something you don’t need. You can find a fee-only planner through the Garrett Planning Network and/or NAPFA, the National Association of Personal Financial Advisors. FULL DISCLOSURE: I am a member of both organizations, which merely means that I believe in their missions.