On Valentine’s Day, what could possibly be more romantic than flowers, chocolate…and life insurance?
On second thought, let’s reserve February 14 for sweet notes, roses, and intimate dinners. Do the life insurance part on February 13 (or save it till the 15th). But definitely do it. Here’s why…
Life insurance is love assurance. It demonstrates you’re thinking about someone other than yourself. And you’re not merely thinking about them, you’re doing something practical to take good care of them.
To be sure, putting money in a Roth IRA or a 401(k) is also a way of taking care of loved ones. But let’s face it, you’ll benefit from those investments if you live long enough.
Not so with life insurance. It screams “unselfishness.” It assures your loved ones you’re thinking of them and their wellbeing. (Because, obviously, you’re not going to be around to spend those insurance proceeds on yourself!)
Life insurance isn’t romantic or sexy (not even if you put your new policy in a lacy, red binder). It is, however, tangible evidence of love.
If you’ve hung with me so far, you might be wondering, “Okay then, Casanova, how much life insurance should I get?”
Mostly, you want your loved ones to be financially sound should you die prematurely. The purpose of life insurance is to replace the income of the one who died.
Let me give an example. (You can plug your own numbers into the following scenario.)
If your currently salary is $50,000, you want a lump sum of money that, properly invested, will pay your beneficiaries $50,000 annually. It’s helpful to think about it this way: How much money would it take for your family to maintain a $50,000 level of income?
One way to calculate this is to work backwards. Let’s assume you could conservatively earn a 3% rate of return on your money. Divide $50,000 by 3% and you get $1,666,666.
That means if you were to die today, your loved ones would need to have $1.66 million earning a conservative 3% return in order to make up for your lost salary. Don’t have $1.66 million in the bank? That means you’ll need $1.66 million worth of life insurance coverage.
One way your survivor(s) could get by with a lesser amount is by using a lifetime income annuity. A 40 year-old widow could put about $1,000,000 into a lifetime income annuity and guarantee herself a $50,000 income for life…but nothing would be left over afterward.
For most people, numbers this large make their eyes grow wide. But it takes a big number for a family to be financial independent for a lot of years.
As far as what kind of life insurance to buy, I recommend—especially if you’re young—buying inexpensive term insurance. As you get older you may find it less expensive and more productive to acquire some sort of permanent insurance coverage. That might be whole life, universal or variable. You can (and should) discuss all these insurance options with a licensed, experienced agent.
But don’t get caught up in the type of insurance until you settle on the right amount. For now, get it all in term if that’s what it takes.
If you live a normal life span (currently 78.5 years for Americans), you’ll have plenty of time to configure your protection program so that you have the “right kind” of insurance. But since life is unpredictable, you may only have one chance to get the right amount.
So, get it right the first time.
Remember two things: 1. Life insurance really is love assurance. 2. On Valentine’s Day, to ensure you don’t end up in the doghouse, make sure you do something extra sweet for your sweetheart!