Money Isn’t The Only Thing, But It Touches Everything
Investing is for living too long. Life insurance is for dying too soon. We suggest keeping the two jobs separate as the work serves entirely different purposes.
Typically we use insurance for dying and savings and investing for living after your last paycheck. Mixing the two is not the most efficient use of money, although sometimes it does come close. Like all things there is never a one size fits all answer but there is a one size fits most answer. Buy term and invest the difference. The first step for EVERYONE, however, is to First determine if insurance is needed. If the answer is yes, the second question is how much coverage do you need today? You wouldn’t buy car insurance if you didn’t own a car, right? Here are 3 simple questions to ask:
1. Does anyone rely on my income? (I.E. Spouse, kids, parents)
a. If no, then no life insurance is needed. If so, move on to 2 & 3.
2. How much per month or year will they need if I’m not here? (Another way to look at it is for each breadwinner in the household to determine if I lose your income today, how much money do I need tomorrow?)
3. How long will this person/persons be relying on me for income? (I.E. kids will be until they can support themselves, spouse and/or ex-spouse could be forever.)
As investments, there are typically two types of insurance products. Annuities & Cash Value Life Insurance. Annuities should be considered when future income is needed. Cash Value Life Insurance should be considered when you’re already funded your retirement accounts, like 401ks and IRAs, and there remains a permanent need for insurance for life along with tax-deferred savings. But keep in mind the details of “tax-free money” include the reality of borrowing your own money.
As we get older, the need for insurance changes. When you’re on your own, no spouse or kids, there is typically not a need for life insurance at all. After all, there’s no insurable interest. When you are in a living situation with a partner or you get married and have kids, however, term insurance is usually very important and fits very well into the equation. Too many people get lost in the woods of the type of coverage. The most important piece of the puzzle, first and foremost, is how much coverage is needed. If, for example, you are dependent on the income of someone bringing home $80,000 a year and you don’t want to miss a penny of that income, the 4 percent withdrawal rule shows you need $2,000,000 of life coverage on that person today. That way, you might miss the breadwinner, but you won’t miss their money. Money isn’t the only thing, but it touches everything. This means you will have the means to continue life as you like to live it so you may be better able to handle the emotion of loss.
The loss of a loved one is difficult enough. On top of that dealing with the sudden loss of their income can be devastating. No wonder everybody in the family is crying.
When the kids are out of the house and you have a retirement plan in place, life insurance becomes optional and often times not needed again. Somewhere along the lines, a long term care policy should be considered although those policies have changed a lot over the years as people live longer. Living and dying are two separate problems that require two separate answers. Sometimes they can be combined into one solution although everyone should be working with a professional who understands the problems completely and isn’t a one horse pony professional.
As we amass more assets, we have to protect those assets. This is why we have policies for our home and cars. An umbrella policy is used to protect us from major events that go beyond our home and auto policies. With the right insurance policies, we reduce the need to keep savings in the bank to pay for things the insurance will cover. We have assigned the risk we are not willing to take to a company that is the business of accepting that risk. If you have a car accident and your deductible is $1,000, that’s all the cash you need to have to fix the car(s). You should keep enough cash to cover you in an emergency, like your out of pocket cost or deductibles, and the rest can be used for long term investing. This will protect your future along with your present. With planning and implementation, you can have both.
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