Whether or not you want to think about it or ignore it you are not going to be here at some point in the future. Sad, but true, we all pass away. As the old saying goes, “Nothing in life is guaranteed except death and taxes.” So, if we all know what’s coming, we might as well do our best to prepare for it. In this week’s post we’ll cover a topic most will find rather depressing and boring, but it’s also one of the most critical to being financially responsible – life insurance.
Teresa was a healthy 35-year-old family practice physician. She had just finished residency a few years earlier and was starting to build her practice in a new city. Her husband, Jesse, an engineer, had also started a new position shortly after their move. They were parents to three boys ranging in age from 4 to 10. They were a busy family on the go from the time they got up in the morning until well after dark when finally settling down for the night.
Typical of many young professional couples, Jesse and Teresa were also struggling to keep up financially. Teresa’s college and med school loans were well into the six-figures, and Jesse’s masters degree had also set them back tens of thousands of dollars. Instead of continuing to live like a resident after graduating from her training, Teresa and Jesse made the typical doctor lifestyle upgrades in cars they were now leasing and purchasing the big doctor home in a gated community.
One bright spot in their lives was their income that more than covered their monthly payments. However, they weren’t building any wealth with all the payments, and like many young couples, had yet to start thinking about their financial future when disaster struck. For several weeks Teresa was experiencing abdominal pain and feeling bloated. She thought that it would pass, but after a month she decided it was time to see her doctor to find out what was wrong. The news wasn’t good. Teresa was diagnosed with stage four ovarian cancer.
Teresa fought through the treatments, but her cancer didn’t respond positively. After a year her fight with cancer ended and she passed away, leaving behind Jesse to raise their young family. As if the grief of losing his wife wasn’t enough, Jesse also had the burden of determining how to deal with the financial hole he now found himself in. He and Teresa had talked several times about getting life insurance, but never pulled the trigger. That decision was now haunting him as he struggled to see a way out of the deficit he now faced.
Jack was ten years out of residency and working to build a thriving general surgery practice in his hometown. He and his wife Maria were living the dream with their four children. As the children got older and ready to start school the couple decided Maria would put her career as a financial analyst on hold to stay at home with the children. Jack’s salary was growing with his practice, and despite having student loan debt and a mortgage, they could still easily swing the monthly payments on his income alone.
Fast cars were one of Jack’s passions. He was finally able to purchase his dream car, a Porsche 911 Turbo, that could do 0-60 in under 4 seconds. Aside from the flashy doctor car, Jack and Maria lived a modest lifestyle in a nice home, but nothing overly extravagant. A few years out of residency Jack and Maria had begun to think about their future and realized if they didn’t get serious about paying off their debt they may never be financially secure. As part of their planning process they also discussed scenarios involving their deaths.
What if Jack died? How would they make the house payment? How would they pay for living expenses? Could they survive on only Maria’s salary if she went back to work? What if Maria died? Who would take care of the kids? Who would manage the day-to-day household duties? These were just a few of the questions that led them to determining they both needed to have life insurance to be prepared for either of their deaths.
The prior conversation about life insurance became more important when Jack lost control of his sportscar one icy morning on the way to work and collided with a tree. Fortunately, Jack survived with minimal injuries and was able to return to work after a few days of recovery, but that conversation he and Maria had regarding life insurance was all he could think about while he lay in his bed resting his sore body. Jack was just a few inches from death, and of course was thankful he survived, but he was also thankful and took comfort in knowing if he had died Maria and the children would have been OK financially. He realized one of the most loving things he had done in his life was to purchase life insurance to take care of those he was responsible for.
Teresa and Jack both have sad stories, and often we want to avoid talking about death, but it happens. Sorry to break it to you, but you will die. Hopefully, your death is one that comes in very old age after a rich fulfilling life, but no one can predict the date of their death. All we can do is make sure we’re prepared for it when it eventually comes. For many, part of that planning includes life insurance.
Types of life insurance.
There are many types of life insurance. Let’s look at the most common types you’ll likely run into when shopping for a policy. All policies can generally be broken into two categories of insurance – permanent and term. Just as they are described, one type is permanent and the other is for a specified period of time, usually 10-30 years. We’ll cut to the chase and let you know we, as nearly all financial experts, recommend term insurance.
Permanent insurance, commonly described as whole life insurance, is usually sold as not only insurance, but as an investment (a very poor one in our opinion). The downsides of these policies are many, but the biggest is that the premiums are 10-15 times higher than term insurance for the same amount of coverage. Be cautious of sales agents pushing whole life insurance. They are pushy for a reason. The commissions on whole life are big, making their motivation not to do what’s best for you, but instead what’s best for them. If you want to see a more detailed comparison of whole life versus term read this article.
How much do you need?
Like most things the more you buy the more it costs. Insurance is no different. A higher payout will have a higher premium. So how much should you get? A simple rule-of-thumb to begin with is 10-12 times the annual salary of the one being insured. For example, a doctor making $250K should consider a policy of $2.5-$3M. The reasoning behind the 10-12 times rule is that if you invest the policy proceeds in a good growth mutual fund you will be able to earn from the fund each year what the salary of the once insured earned, replacing their income theoretically for life. Of course, this depends on the market, and no fund returns 10-12% every year, but this is a good starting point when deciding on how much you need.
How long a term do you need?
Another question to consider for term insurance is how long a time period you want the insurance to run. The longer the term generally the higher the premium because the risk to the insurer is greater. A good way to determine how long you need your term to run is how long those who count on your income would be dependent on it. For example, if you have children how many years will it be before they will be able to support themselves?
Do you need life insurance?
Not everyone needs life insurance. If you’re single and no one depends on your income you may not need insurance. However, you may want to consider a small policy to cover final expenses (i.e. burial, dealing with your estate). If you have debt you may want a policy to cover your debts, but in most cases when you die so do your debts.
Another reason you may not need life insurance is if you are in a position to self-insure. This is where we’d love to see all of our readers some day when you have enough assets (i.e. investments, cash, rental property, etc.) that your death would have little to no impact financially on those you’re leaving behind.
Our best advice as we finish this post is not to wait to get insured. Purchase a term policy for 10-12 times your annual salary or what it would take to replace a stay at home spouse and make it for a term long enough to cover your family until they could become self-sufficient. It really is that simple.
Scott is a good reminder of what could also happen to you if you wait too long to get insured. He was diagnosed with Myasthenia Gravis before purchasing life insurance. While he’s living a somewhat normal life with the disease, a cancerous tumor along with his thymus gland had to be removed, and no insurance company wanted to touch him until he was cancer-free for five years. The best time to get insured is when you’re young and healthy so even when you get older and have to deal with an illness you will be insured.
You should also consider purchasing a policy that is not attached to your employment. While there’s nothing wrong with getting a policy through your employer, which is usually less expensive, the downside is you can almost never take that policy with you when you leave the job, and if your health has changed during your time of employment you may find yourself uninsurable or having to pay a much higher premium. We would suggest supplementing your employer sponsored life insurance with your own insurance.
Finally, the best reason to get insured is looking you in the face each day of your life. You buy insurance not for yourself, but for those you love and who count on your income or the work you do as a stay at home spouse to provide and care for them. Having to live without you is hard enough. Don’t add to their hardship by not getting insured in the next week! A few mouse-clicks and blanks to fill in along with a simple health check and you’ll be able to rest assured your loved ones are protected from financial disaster.