I always thought that life insurance is kind of a misnomer. Unlike property and casualty insurance, our lives aren’t replaced or repaired in the event of our death. But life insurance is the ultimate rainy day protection for our families and those we care about.
Why do I need life insurance?
No one likes to talk about their death. I know I don’t. But in the event of our demise, how will our spouses pay the bills? How will our children go to college? When a family goes from two incomes to one (or from one to none), life insurance fills the gap. Without it, the survivors may be looking at a significant lifestyle change.
So even though you can never be replaced, you can arrange for the replacement of your income.
How much life insurance do I need?
This question may depend on your life stage. But experts, like Dave Ramsey, suggest ten times your income. Naturally, this amount may vary depending on your stage of life or for those who live alone.
Why that multiplier? At ten times your income, the income being replaced is 10% of the death benefit. Properly invested in a stock market mutual fund or ETFs, your death benefit will effectively replace your income.
What if I don’t work?
If you’re young, longer term life insurance will be inexpensive, and people in their 20’s are likely insurable. Waiting only makes the insurance more expensive, and the risk of being uninsurable increases.
If you have a stay-at-home parent, you still need life insurance. If something happens to a stay-at-home mom, the widower now needs to find daycare or hire a nanny. According to Salary.com, the value of a stay at home mom is north of $150,000. So multiply $150,000 time the number of years until the youngest child starts kindergarten. This is usually $200,000 to $400,000.
The main purpose of this week’s post is to convince readers that life insurance is indeed an important part of their overall financial well-being. Remember, even though we may be gone, there could be others who still depend on us.
Next week, I will explain the difference between term life insurance and permanent life insurance and which I recommend.