23
Apr
12

Protecting Income – Life Insurance

We have come to realize that the Personal Finance blügs are stuffed full of, “Yea! Roth IRA!,” “Debt is evil,” “Earn more with a blüg,” “Landlord = Passive Income” etc.  The same themes seem to be recycled and regurgitated in different size chunks and a different color.  But, one topic is rarely covered, investing.  Actual, investing advice.  While we don’t pretend to be experts, we are going to start series for putting people on the path to retirement and achieving their goals.  Perhaps this is not as interesting as how much we spent on clothes last week.  But, actual investing articles aren’t regularly covered in hot & heavy detail in the personal finance blüg-o-sphere.  We choose not to disclose our portfolio size and age because we believe our ideas should stand on their own.  That is to say, it doesn’t matter if we are 25 year old millionaires or 50 year old wannabe retirees with $10k to our name, because our ideas are valid regardless.  Well, maybe it would give us some street cred if we did unveil our portfolio, but our ideas should stand without the backing of (or lack there of) our personal portfolio.  And perhaps this will bring the readership down from 1 person to 0 people.

We still plan to post twice a week, and we may jump around from series to series or whatever we think is important.  But, you’ll know what is coming down the pipeline.  And if you want to see something or see something sooner, let us know.  We are thinking of adding a “carnival” type post on Fridays, but focusing more on those who ignore us or offer up misleading information.  But right now, we’re still at 2 posts per week, Monday & Thursday.  Without further adieu…

  1. Life Insurance
  2. Disability Insurance
  3. Shopping for Life & Disability Insurance
  4. Social Security Survivor & Disability Benefits
  5. Will Life insurance benefits be taxed?
  6. Emergency Fund
  7. Umbrella Insurance

Ok, so after our diatribe above about blügs not talking about investing, we start out talking about a non-investing topic.  But, protecting your income is SOOOOOOOO important, that we will kick off with this series.  Your ship can be sunk if you aren’t protected.

At one point or another, we will all think about the need for life insurance.  And while this topic is covered ad nauseous in the personal finance blüg-o-sphere, we have some additional points to offer.  First, only consider life insurance if someone depends on you.  If you vanish like a fart in the wind, will the loss of your income result in others eating cat food?  If not, you don’t need life insurance.  That funeral thing is a crappy sole reason to take out a life insurance policy.  If no one depends on your income, you should be debt free (see entire personal finance blüg-o-sphere on why it is a bad idea to be in debt – “bad” debt as it is coined – and how you can escape its grasp) and have an emergency fund in cash (or CD’s) that should cover those expenses.

The first decision is to decide what kind of life insurance you need.  Most tend to point people in the way of term.  And we agree.  Term offers lower premiums and if everything works out as planned, you never see your money again.  So yes, term life insurance premiums are non-refundable and you can never see them again (there are exceptions to everything, if you kick the bucket before the often no more than 2 year contestability period and the company feels you defrauded them, they give you back your premiums and say, “no thanks”).  There are other life insurance products out there, and we know less about those than we know about “every inch of our glorious naked bodies” (gag!).  But, they combine insurance with investments products.  And our general rule of thumb is, don’t invest a dime with an insurance company if you can help it.  So, these “whole life” products have higher premiums (which we assume an insurance agent reaps a greater kickback).  And their “investments” are sub-par at best.  Again, we don’t know intimate details because we won’t ever buy a “whole” or “universal” life policy.  TERM is the best for almost everyone shopping for a life insurance policy.  The exception is, if you are über rich and have some estate planning trickeration up your sleeve.

A couple of decisions need to be made up front before you start shopping.  1) You need to know how much coverage you need, 2) you need to know how long you need it and 3) you need to decide on what kind of insurance company to take your policy out at.

1) How much moolah do you need?  Tres simple, when will you die and what will be the condition of your assets, liabilities and dependents when your death date arrives?  Ok, so not so simple.  You can always search the interwebz as well.  But know this, have your number calculated and be confident in it before you start shopping.

One thing we always advise people is to keep a budget.  This helps you to understand your actual expenses, because these differ from your salary (again, if your expenses>salary, see the blüg-o-sphere if you need help with this).  A quick and dirty way is to take your annual expenses less what a spouse/partner will contribute once you die and multiple it by 25 (this is based off the “4% rule” which we need to blüg about, so much time and so little to cover).  If you think 4% annual withdrawal rate is too much or too little, take the inverse of what ever withdrawal rate you find acceptable and then multiply it by your annual expenses.

Do you want your children(s) to go to college?  What about daycare?  Or do you want them to have a personal nanny?  Are your survivors going to keep up with the same lifestyle or decrease it?  This list not near exhaustive, but these are all things you need to think about and discuss with your boss beneficiaries.  You may need to decrease your benefit amount or increase it depending on what the plan is if you take your dirt nap.

What about your current assets? The first question you should ask yourself is, is there a consequence for using those assets?  Such as a 401(k) or IRA (these rules for passing off to beneficiary is not as simple as one would hope) penalty for a non-qualified distribution.  Also, will your survivors get social security?  Depending on the liquidity of your financial assets and your conspiracy theories about social security, you may need to adjust the amount of your benefit down.

The trickiest part to account for is the unknown.  What if you die and one of your children(s) becomes ill, incurring huge medical bills?  And what if your spouse had just become disabled before that (hopefully covered with disability insurance), where would the expensive medical insurance come from?  This is just one scenario of a whole list of events which can set you back.  Life insurance is cheap, add a little to your benefit to cover for unplanned events.

2) How long do you need life insurance coverage?  Let it be known, life insurance is relatively cheap if you are young and healthy.  We suggest the longest term you can afford.  Why?  Who knows what will happen!  (see example above).  You can plot up your path to financial independence and extrapolate it out.  But, you can have a bump or two that will set you back.  We’ve shared this before, but Mike Tyson said, “Everyone has a plan until they get punched in the face.”

3) What insurance company should I take out my policy with?  One with a high credit rating.  But, we think everyone should do more in depth research of the company they will insure with.  Mainly because the credit rating agencies are based on today’s indicators (and we think sometimes money under the table).  But that doesn’t indicate the underlying risk in which a company takes.  We don’t have to go far back in history, and hopefully it is still in our memory, to remember AIG had excellent credit ratings, but almost went under during the latest recession starting in 2008.

Another consideration is if you want a mutual or stock company.  A mutual company is owned by its policy owners.  So, profit is not the company’s main priority, and they are able to take what profit they would make and return it to the policy owners.  A Stock company is what it sounds like, it is a for profit entity.  Other analogies are Vanguard (mutual) vs Fidelity (stock), a Credit Union vs Chase.  But it is important to point out, that not all mutual companies have the same financial footing.  And some stock companies are solid as well.  So, looking at the credit ratings and financial reports are important as well.

Our crush is on Guardian (a mutual company, it’s complicated).  Never heard of them?  Probably so.  But they are a very conservative and financially strong insurance company.  We’ll cover them more in the upcoming post on disability insurance.  When we were shopping for LI policies a year or so ago, we wanted to get our policies through Guardian.  We also have a nasty habit of multi-pitch traditional climbing.  Because of this nasty habit, Guardian came back with a $15,000/yr premium, opposed to the ~$1800/yr we were looking at.  They didn’t want to touch our climbing.  And maybe rightfully so.

Remember, we don’t get any kick backs or offer up any affiliate links.  Based on our research, we are offering what we know to be the best.  Do your own research as well. 

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3 Responses to “Protecting Income – Life Insurance”


  1. 1 AverageJoe
    April 24, 2012 at 4:17 pm

    Nice coverage of life insurance basics (especially how to determine “how much you need.” In the biz we used to call this the “capital needs analysis.”

    I’d add that when shopping insurances use an aggregator, if possible. I like seeing policies from quite a few different companies. Most of these sites will show you the firm’s credit strength, so you won’t have to worry about how to navigate AM Best, Moody’s, etc…..

    • April 24, 2012 at 4:34 pm

      Thanks AvgJo! We have an article coming up on shopping for a life & disability insurance. Cliff notes version is to use a trust worthy agent that you like, and a site which will “Aggregate” quotes from many companies for you. We have a specific one we like, but we’d hate to spoil the ending. Oh wait, we just did….

      And we’re working on the bonds. We just haven’t published anything yet…just muddling through.

  2. April 25, 2012 at 8:00 pm

    Great information on Life Insurance. When my wife and I got life insurance, we wanted to make sure the amount was enough to cover all the bills so the other one could live comfortably for as long as needed, and take care of any children.


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