Have you ever thought about what would happen if you or your spouse passed unexpectedly? I know that this is a subject we don’t really like to talk, or even think about. Up until the beginning of the year, I never even thought about this myself. It was not until I started researching life insurance that I realized just how important it was. I always thought “I’m still young. Why would I need life insurance?” Oh how my view on this has changed in the past several months.
As someone who was naïve about how life insurance works and why one may need it, I never thought about taking out a policy. However, back in March of this year, my wife and I decided to get life insurance after we discovered just how scary it would be not having it.
I know what I am about to say sounds so very negative, but sometimes this is what we need to hear; at least it is what I needed to hear. Life insurance is not at all about you, it’s about your family. What happens to your family if you pass unexpectedly? Our time here on earth is precious and we never know when it will come to an end. According to Parting.com, the average funeral cost between $7,000 and $10,000. This is a lot to come up with, especially if you are still working on your emergency fund. If your spouse and children depend on your income to live, what will they do when that income is no longer? On top of everything that comes with the loss of a loved one, they now have to worry about how they are going to continue financially. Once I realized all this, I decided that this is not something I want to put my wife and children through.
Although my wife and I both have life insurance through our employers, it is simply not enough. We both are fortunate to have work policies that cover two times our annual income. That may sound great, but after funeral/final expenses, that covers my family for less than 2 years! Then what happens? 2 years is not enough time to try to replace that income.
Many money experts recommend 7-10 years of annual income worth of life insurance on a 20 or more year policy. So, if you make $30,000 a year, you need at least a 20-year term life $210,000 policy. The good news is that if you are in good health, it is less expensive than you probably think.
There is another part of this that I never realized as well. That is how to be smart with the insurance money in the unfortunate event that is needs to be used. Before learning more about finance, I figured that when life insurance is cashed out, the beneficiary then has this great big balance in his or her checking account to help pay the bills. Although this can be true, I think there is a better way to use this money. Invest it! Yes I know that there will be some needed right away to cover immediate costs, but after that, if you and your spouse were financially smart enough to get life insurance, you also need to be financially smart when you receive the benefit. After all, this is just a one time payment that you are using to replace a steady income.
Here is an example. Let’s say you make $50,000 a year and have a $500,000 policy. You pass unexpectedly and your spouse cashes out the policy. $10,000 is used for a funeral, $100,000 is put away to cover your income for 2 years and you have $390,000 left over. So what do you do? Invest it. If you can put that $390,000 in a mutual fund that averages 10% growth a year, suddenly that $50,000 income that you lost is now only an $11,000 loss. Now, since your lifestyle will more than likely change as well, your expenses will drop and chances are that this loss even itself out.
Of course this investment will not happen right away (and it shouldn’t). You need to make sure you take all the time you need after the loss before making any big changes with your finances. Also, you need to have a plan before all of this happens as well. My wife and I have discussed before that this type of plan is what each of our wishes would be. We both know that in the event that the unimaginable happens, there is a plan in place.
I am grateful that I have learned this when I did since the longer you wait to get term-life insurance, the more expensive it will likely be. If life insurance is something that you don’t have, but have thought about, I urge you to do your research and get a policy. There are other things that I have learned that I never realized about life insurance, but those I will save for a future post. Although there is a bit to know, by taking the time to research and learn, we are taking steps to defeat normal.
What are your thoughts on life insurance? Do you have it? Do you see it as a good choice? I would love you hear your experience and your idea. Please comment below. I can also be reached directly via email at email@example.com or on Twitter @defeatingnormal.