I talk to clients frequently that are pondering whether to buy life insurance of if they want to self insure. I have always believed in using the leverage of the the insurance policy and letting the insurance company pay the death benefit. If you self insure, you have to have dollar for dollar saved for you to leave the benefit to your beneficiaries.
We don’t work our whole lives to get into retirement to hord the money and not feel like we can spend it. If you are self insuring, you are more apt to feel like you need to conserve the assets you have accumulated. In other words, you worked your whole life to have an enjoyable retirement and now you are cutting back. If you have life insurance in place it can serve as a permission slip to spend some of your assets. For example, if you have a 1 million dollar permanent life insurance policy, you will have a death benefit replace 1 million dollars of assets you might spend in retirement. I am not saying to get crazy with your assets in retirement and spend all of them, but the insurance certainly provides for a nice cushion. The leverage you get from the insurance is not dollar for dollar like a hard asset that you accumulate.
Should you wait to buy your life insurance until later? That is a good question and gets to the fundamental purpose of the death benefit. Of course, if you know that you will be healthy and/or still alive and able to qualify down the road than you certainly can wait. The problem with that approach is that you never know what the future holds. It can possible save you a few dollars in premiums for the few months that you wait, but it is not worth your families future. The insured rights the small premium check and the client’s family would stand to get a big check.
The natural inclination is to put insurance off and sometimes buy it in a more reactive way. For example, I hear from clients all the time that they decided to finally move on buying it because a friend died or got sick. Another benefit to buying it is the benefit of locking in to your current age. This is important for term insurance and tremendously important with permanent insurance. With whole life insurance you buy in at whatever age you are and the premium remains level for the life of the contract. Besides that, the sooner the policy gets started the more opportunity for the cash value to build up.
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When looking for life insurance you should evaluate some important questions.
Am I being realistic in how far the proceeds will go for my family? How long of a term should I buy or should I get permanent policy.
There are different schools of though on how much insurance to carry. I have never met anyone who had a claim who said that they received too big of a benefit. With the cost of insurance dropping it is very affordable to get a lot of death benefit at a low cost (this is based on age and health of course). I would certainly err on the side of too much rather than too little. I suggest to my clients that they buy enough death benefit that will spin off enough income without touching the principal. For example, if Client A makes $50,000 a year, they would need 1 million dollars invested conservatively at 5% to spin off $50,000 a year income. That is not considering any inflationary factor, but just maintaining the income level for the family at a minimum. There are other ways to estimate this, but this is a good rule of thumb I like to use.
It is important to first and foremost get the amount that you need. Don’t buy to little permanent policy just because you want permanent and can only afford a fraction of what you need. If you need 1 million and can only afford twenty year term, just get the term in place and you can always convert all or part of the term to permanent later. A lot of our clients will buy a blend of cash value life insurance and term. They may have a budget to buy $100,000 0f whole life insurance and $900,000 of term. It is always important above all else to get the amount you need.
