When is the Right Time to Buy More Life Insurance?

Transcript

Next up, we’ve got a question from Gideon. He says, “I currently have life insurance from my employer. I’m early in my career, and I have three kids, and my wife does not work. Should I consider getting more life insurance on myself? And I would even just go as far as to say, when do you need to start considering more life insurance? Or what should he be thinking about in terms of this decision?”

All right, so, getting one, you know, we’re huge fans of life, and even though we are fee-only financial advisors, I mean, we don’t sell any products, we don’t receive any commissions, we love life insurance. Both of us carry a ton of life insurance, and we prefer term insurance. You get the biggest bang for the buck at the lowest cost. That’s kind of a win-win because what you’re hoping is you only need the insurance in place for a specific term. So, your question is, well, how much do I need? A really easy rule of thumb is that you should have, or you can have, about 10 times your annual income in life insurance. Well, if you make $100,000 a year, then maybe a million-dollar policy will suffice. Or, if you have multiple kids and you want the life insurance to cover college or paying off a mortgage, or you’re young and you want to provide for retirement for a spouse, maybe you need more than that. So, the way that you determine how much you need is kind of mathematical. You got to figure out, okay, if I were to not be here tomorrow, what’s going to be left behind that needs to be funded, saving for the future, covering the kids, getting into adulthood, all those sorts of things. That’s kind of how you weigh in your need.

By the way, Brian, I would argue a stay-at-home spouse also has an insurable need. I know in my case, my wife stays home with our children. We carry life insurance on her because if something happened to her tomorrow, I would absolutely need help. Someone to step in and help cover the roles and responsibilities that she does for a household. So, I do think it makes sense. And so Gideon is asking the question, Brian, all right, employer versus going out and getting it on my own, how do I know which one, and what are the differences, or are there any? Are there even any differences?

Yeah, there are two questions built into this question. First, let’s talk about employer versus you going out and getting your own insurance. Employer, look, there’s more likely to give you $50,000 for free because that’s what the IRS allows them to give you for free and still be deductible to the employer. So, that’s what a lot of them do. Above and beyond that, you might want to go independent, especially if you’re young and healthy because guess what? It’s no different than a lot of other insurances offered from your employer. When they look at your employer as a pool, the young and healthy will likely subsidize the older and unhealthy. So, if you look around your peer group, your co-workers, and you know there’s somebody who’s taking smoke breaks and you know, maybe you look at their dietary choices, if you’re looking at yourself as you’re going to the gym and you’re eating healthy and stuff, you’re like, yeah, I’m probably subsidizing that to some degree. So, that’s just the reality of employer benefits because they kind of take the pool and they use that to give a fair deal to everybody. But because you actually get to set the rules, you can look at them and say, “Hey, I’m young, I’m healthy, plus I’d like to potentially have some portability.” And look, a lot of employer plans are portable, but it’s not guaranteed. At least if you go buy the policy yourself, you control how all that gets made, how the policy gets maintained, whether you’re working for this company or not working for this company. But don’t walk away from the free fifty thousand. That’s the first thing I’ll say.

Now let’s move to the second part of this question, which is life insurance in general. Bo did a good job, but I just broke it into three quick things. The first is, I always ask what’s the term, and I use that word purposefully because what you’re trying to protect yourself from will more than likely have an expiration date. If you’re doing everything that you’re supposed to like if you’re saving the 20, 25 if you’re following the Financial Order of Operations and you’re raising the kiddos and so forth in a good way, hopefully, eventually, they leave the nest, they’re paying for their own bills. You know, 20 years in the future, 25 years in the future, they’re out of college, they’re on their own. You don’t have to worry about that. You know that has a term, that has an expiration date. You’re going to figure out all those different things that impact your financial life because there’s also a term on your mortgages, a term on when you think you’ll retire. If you start writing down all the periods that have expiration dates, you can quickly try to figure out when those key dates are and then go by term insurance that will give you coverage through all those big financial life needs. Then it’s part of your inventory. I always talk about what’s the what and who of what you’re trying to protect. This is where you’ll look at, okay, I have a spouse and three kids. Well, the kids all will have education goals. The spouse, you know, what do they have coming in income-wise? When will we actually be financially independent? You need to write all those things out. And then I want you to figure out where the intersection is between your growing assets that you’re saving and investing in the future versus when the demand for coverage starts going down. You will have an intersection point. And that’s when, congratulations, you’re self-insured. Yep. You actually have enough assets. Now, does that mean when you cross that intersection point, you should just say, “Man, give it a beautiful day. Let’s just quit paying these term insurance premiums?” Um, because I’ve made it to financial plans, the answer is likely not. Yeah, it’s a lot, but it depends, but you ought to at least look at it. Because remember, the way life insurance works is while you’re, it’s not too much different than your group employer plan when you look at the smoker or the poor dietary choices. You realize your young healthy self is subsidizing that. When you buy life insurance, even a term policy, it’s kind of the same way. While your younger self is healthy, your cost of insurance when they do a level term, they know, “Okay, look, the cost of insurance for while they’re in their 20s is this minimal amount, but we’re going to charge this premium. It’s going to have a little bit extra in it because it’s going to cover for that 10-15 years that this person is young and healthy.”

But, as your older self, you’ll realize that no matter how well you take care of yourself, we all get older and start having health issues. We won’t be here forever, so it’s one of those things where your premiums, when you’re younger, will subsidize your older self. So, if you do cross that intersection of financial independence where you’re self-insured, it doesn’t mean you should throw away that policy. Realize that you might be getting a pretty sweet deal if you’re paying a low, minuscule amount per month. The value of that insurance might actually be higher. It’s not uncommon for us to tell people, “Hey, you might want to consider just paying until the term ends and then seeing what the true cost of the insurance is.” Just because you’d feel horrible if you canceled the insurance and then something unfortunate happened when you were actually in that part where it’s a heavily subsidized premium.

For more information on this topic, check out this show called “How Do I Tell Someone That Buying Whole Life Insurance is a Mistake?”