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Looking for Life Insurance Tips and Advice?

Life insurance tips and advice can be confusing.

Whole Life. Term Insurance. Are those the only 2 types and is one better than the other? When should you buy life insurance and is there ever a time you don’t need it.

There are a lot of questions. Most of us weren’t taught how to shop for insurance at school or by our parents.

The right insurance policy will replace your income for your spouse and/or kids in the event the unthinkable happens to you. It provides them with peace of mind during the worst moment in their lives.

But it also could mean the difference between being provided for and losing everything.

In this post, we’re exploring and demystifying everything you need to know about life insurance. We’ll break down the types and costs. We’ll calculate exactly how much coverage you need.

We also explore who needs it and who doesn’t!

But ultimately, join me as we look at all the crucial life insurance tips and advice you need to know to protect your family.

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The terrible truth about children’s life insurance policies

You need life insurance if someone depends on your salary to live.

Thus, right out of the gate, let’s knock life insurance for kids right out the window.

It’s a gimmick. A trick.

It’s designed to play on the emotions of parents (especially new parents). “You DO want your baby to be insured in the event of the unthinkable, don’t you?”

I can feel the guilt swelling even now. Any life insurance tips and advice worth anything will assuredly tell you to stay away from this scam.

The death of a child, however tragic, will have a somewhat minimal impact on the parents financially. Certainly the parents might need some time off work, but hopefully, you work somewhere with vacation or personal time built into your benefits.

On average, according to ChildTrends, the number of children who won’t reach age 20 is just a hair over 1%. So even if you thought you needed life insurance on your child, you’re insuring against something that only has a 1% chance of happening.

You’d be better off buying life insurance against meteor damage to your roof.

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Do you need life insurance after age 50?

Life insurance is not something you likely need if you’re older and the kids are grown.

And it goes without saying that it’s less important if you’re either single or retired and you and your spouse have built a nice nest egg.

Again, life insurance is designed to prevent hardship due to the loss of your income. It should not be viewed as a means of a retirement benefit or a savings account.

If that’s what you need, there are much better vehicles out there for that. Thus life insurance tips and advice should not steer you towards life insurance for purposes of savings.

So in my case, at age 54 with a 10-month-old daughter, I DO need life insurance.

If your kids are grown and out of the house and you have a good-sized retirement nest egg and/or your spouse has a great income, you may want to consider dropping it.

Life insurance is NOT the same as an inheritance!

I’m not knocking the idea of leaving an inheritance for your heirs whatsoever.

That’s just not the purpose of life insurance.

Life insurance should be to protect your loved ones financially in the event of your death and the loss of your income. That’s it.

To provide children and grandchildren an inheritance, I think looking at true investment opportunities is a much better idea.

Open an IRA for the kids.

For school-age kids, open a 529 College account (basically an IRA that can only be used for education purposes). Have a trust that pays out your assets upon your death in a manner you outline in your will.

Retirement or inheritance planning is NOT the job for life insurance.

Need help thinking about retirement? I’ve covered that in a previous post too, so if you need help to Save for Retirement, I highly recommend taking a moment to check out that post.

When will I drop my life insurance coverage?

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Most Americans are more financially prepared for death than disabling events. However, you’re more likely to become disabled than die.

Get a fast, free quote today. https://t.co/c2isi3fOTg #disability #disabilityawareness #daveramsey pic.twitter.com/dAkEd5Ndpf

— Zander Insurance (@zanderinsurance) May 1, 2018

By the time I’m 70, my oldest daughters will be pushing 30. My youngest daughter will be graduating high school and will soon no longer be in need of my ongoing financial assistance.

My wife will still be working since she’s younger than me.

By then her income will likely have at least doubled from what it is now as she’ll have her masters by then.

We will also hopefully have quite a large nest egg in our Roth IRA and other investments.

Thus, the likelihood of anyone needing my income to live comfortably will be greatly diminished by then. Good news considering the cost of life insurance continues to rise as we age.

Life insurance is most needed by parents who work when they have kids under age 18.

If I were to die, while my wife works as much as I do, she would be in financial hardship with the loss of my salary. I too would be in financial hardship if she were to die, although not as much as she since my salary is higher (she’s in teaching, ’nuff said).

So we just need enough life insurance to replace the other’s salary so we can continue with at least no financial disruption.

Four out of 10 people don’t have life insurance and may not realize what an impact it can make. Let’s make sure you have what you need. pic.twitter.com/YW5gFrxcqg

— Reggie (@RGallegosAgency) January 29, 2017

So how much Life Insurance do you need?

Let’s say Larry makes $60,000/year and his spouse Kris makes $45,000/year.

As a general rule, you want about 10 times your annual salary in life insurance. The “why” we’ll get to in a second. So Larry would need $600,000 in coverage and Kris would need $450,000 in coverage.

In the event of Larry’s death, Kris would take that $600,000 and invest it into good mutual funds.

Look for funds that, on average, have a track record of 5-10 years and earn an average of 10% interest or more. Thus, if Kris takes 10% out of that each year (leaving the principal untouched so it can continue to earn interest), Kris will be getting approximately $60,000/year; the same as Larry’s salary.

Need help understanding the investing concepts I’m referring to here? Check out my Investing Tips for Beginners!

Of course, that money won’t earn interest immediately. The market also goes up and down and some years may be better than others. Thus if Kris’ career is less stable or expenses more variable, it might make more sense for Larry to take out even more coverage.

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What are the two main types of life insurance?

This is where I get even more opinionated with my life insurance tips and advice! At this point, while there are probably a half dozen types of life insurance, 99% of what is sold out there probably falls into one of two categories:

WHOLE LIFE/CASH VALUE LIFE INSURANCE
TERM LIFE INSURANCE

Is a whole life policy worth it?

A whole life (sometimes called cash value) is a policy you buy for the rest of your life and you pay monthly.

Yes, I know it’s a bit dramatic to show a picture of money on fire under this topic. But of all my life insurance tips and advice, I feel pretty strongly about just how bad these policies are.

You are figuratively burning money!

Whole life is also sometimes called cash value life insurance. It typically costs more per month, but no matter what happens in your life with illness or injury; you have that coverage.

Your monthly payment also does not change as you age. That could be viewed as another plus (but if your payment is 2-3 times what a term life insurance policy would be you have to consider that too). Often you don’t need a full medical exam. That could be considered another benefit.

My biggest beef with whole life insurance tips and advice is that they sell you on this somehow being a great investment. That it builds cash inside of it the way an IRA would.

It is an investment; just not a good one.

If you decided to cancel the policy you can get paid the “cash value” inside of it (less any of their fees, of course). However, in the event of your death, your beneficiary only gets the face value of the policy; not whatever the cash value is.

Thus if over 30 years you built up a cash value of $50,000 on a $200,000 policy, your beneficiary only gets the $200k. The company keeps your $50k cash value.

Why do so many companies sell whole life insurance?

Because it makes the company (and thus the agent getting the commission) a lot more money.

The other reason I don’t like these policies is that from an investment standpoint, you could usually do much better opening a Roth IRA and investing in mutual funds. Of all my life insurance tips and advice, I feel the most strongly about this.

Why is Cash Value Life Insurance such a bad idea?

Take a look at this whole life insurance chart courtesy of Insure.com

You see that if you kept the policy from age 40 to age 90, you’d have built up your cash value and death benefit to a decent amount.

However, as we’ve already covered, the cash value would typically not be paid out to your heirs upon your death. Also, consider that an annual payment of $1,178 amounts to $98/month for anywhere from $100,000 in coverage up to $323,000.

Personally, I have $800,000 in term life insurance coverage on myself and at age 52, I pay $68/month for that.

Term Life Insurance

This is a policy you buy for a set period of time

Most companies offer 10, 15 or 20-year term life insurance. At the end of your term, the policy expires. If you still need coverage, you buy a new policy. As you age, your premiums most likely increase as the risk of you dying is going up.

However, overall term rates have gotten better over the years, so you may not find much of an increase at all.

There is not a savings component to these plans. You pay, your beneficiary gets the death benefit if you die. That’s it. If the policy ends and you’re still with us, nothing is paid to you; it’s just like car insurance.

Check out how the top term life insurance stack up in this great comparison of the Best Term Life Insurance companies courtesy of Reviews.com.

Which is the best life insurance?

Taken further, let’s assume that at age 40, Larry got that $600,000 term life insurance policy we talked about above.

Most likely, if he’s in decent health and a non-smoker, he’ll be paying about $33/month for that coverage (quote courtesy of Mutual of Omaha Life Insurance Company and quoted at the time this post was originally published).

If he invested the additional $65 he’s not paying for that whole life insurance policy in the chart (which wouldn’t pay Kris anywhere near $600,000 in the event of Larry’s death) let’s see how he fares.

If he invested that $65/month in mutual funds with a track record of earning 10% (or more) per year, guess how much $$ he’d have by age 90 (the highest age listed in the chart)?

He would have $1,126,085 – take that whole life insurance policy!

And of course in his will, Larry could leave 100% of that to Kris!

I calculated that using a calculator from MoneySavingPro. Of course, I have to throw in the whole thing about interest rates vary, your results may differ, and nothing is guaranteed.

My point is not to show you specific amounts. My point is to point out that as a savings or investment tool, whole life insurance policies are terrible! If you only take one of my life insurance tips to heart, this should be the one!

But don’t take my word for this. Hear it yourself from the extremely knowledgeable Dave Ramsey:

Let’s lastly review the difference between a life insurance agent and a life insurance broker.

A life insurance agent works for one company only, such as the biggies you know like Farmers or Prudential. A life insurance broker is an independent person who can shop all the companies and find you the best deal.

I’m not knocking agents. Often an agent you would use is local. Most likely they have an office you can go to when you need help. They may get to know you and your family and that detailed knowledge can help them give you great life insurance tips and advice.

Brokers, on the other hand, often operate online.

They deal with hundreds or thousands of customers across the country. Brokers simply get your particulars, shop around for the best deal and let you choose. They may set up a medical exam, but once the ink’s dry they’ve moved on to the next customer.

So what’s most important to you, service or price?

How do you buy life insurance?

Personally, I have bought all my life insurance online.

But you can go through local agents and brokers as well. Just realize that the more overhead (like a fancy office) a salesperson has, typically the more your coverage may cost.

Ultimately you need to shop around and look for the best deal.

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Personal Capital is the smart way to track and manage your financial life.

Get award-winning financial tools AND personal attention from registered financial advisors for significantly less than traditional financial advisors.

You work hard for your money. Personal Capital can make your money work hard for you.

So what are my . . .

5 Key Life Insurance Tips and Advice to Protect Your Family?

1. GET TERM LIFE INSURANCE ONLY

Probably the most important of the life insurance tips and advice.

As we discussed above, whole life insurance is a terrible option as an investment and it’s expensive. Its only real benefits would be if you have serious health concerns and want to avoid taking a medical exam. Term Life will almost always provide more coverage for less money.

Take that leftover cash each month and invest it!

2. TAKE OUT LIFE INSURANCE ONLY WHEN SOMEONE RELIES ON YOUR SALARY

As we said above, you don’t need life insurance when you’re single and 25. You also probably don’t need it at age 80 with grown kids and you and your spouse have $800,000 in an IRA or 401k.

Get it during the period of your life when someone is dependent on your salary to survive.

3. MAKE THE POLICY LENGTH RIGHT FOR YOUR AGE

Under age 40, I would get 20-year term insurance so you’re covered for the next 2 decades.

If you’re newly married with a baby at age 25 you’ll probably want to get a new policy in 20 years but that can be a smaller amount for a shorter term.

At age 52 like I am, I don’t need a policy that covers me into my 70’s as my kids will be gone, our nest egg will be good and my wife will still likely be working.

4. AS YOUR SALARY INCREASES, MAKE SURE YOU HAVE THE RIGHT COVERAGE AMOUNT

Hopefully, you and your spouse will get some nice annual salary increases.

You don’t need to tweak your policy every year as you get those 3-5% increases but I would suggest reviewing your coverage about every 5 years and see if you need to add on.

You can have multiple term life insurance policies at the same time. Thus if after 5 years, your salary went from $50,000 to $60,000 and you initially had a $400,000 policy, I would get a 2nd policy. For your second policy, probably about $200,000 to $300,000 is about right.

5. SHOP AROUND AND GET THE BEST QUOTE YOU CAN FIND

Personally, I’ve used Zander Insurance (not an affiliate) for my recent quotes and have found they usually get me the cheapest quotes from some great companies. That being said you may know a local agent and like being able to access them whenever you need it.

Either way, I would get at least 3 quotes before choosing one. Most likely you and your spouse will never need to use this, so the lower premium should be high on the priority list.

Do I cover the Life Insurance Tips and Advice you needed?

In this post, we explored the crucial role life insurance plays in our lives and the lives of our family members.

We looked at the pros and cons of both term and cash value policies. Then we explained how to buy it and the difference between an agent and a broker.

More importantly, we explained in everyday language to calculate how much coverage you need (or if you need it at all).

Specifically, we covered ALL the most important life insurance tips and advice that most of us weren’t taught in school or by our parents. That way you can make the most informed and cost-effective decision to protect your family in the event of the unthinkable.

If you have life insurance, what type do you have? Need help getting out of a bad policy or confused about what you should get?

Do you have questions about it I can help with?

If you like this post, please follow my Personal Finances Tips board on Pinterest for more great tips from myself and top insurance experts!

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Photo credits (that aren’t mine), licensed under CC2.0:

Hands – https://www.flickr.com/photos/imarlon/
Retirement street sign – https://www.flickr.com/photos/68751915@N05/
Money on fire – https://www.flickr.com/photos/mikeporesky/
Hand with cash – https://www.flickr.com/photos/calliope/
Guy shrugging – https://www.flickr.com/photos/suthakamal/
Money pile – https://www.flickr.com/photos/aresauburnphotos/

I have had experience shopping for, buying, and canceling life insurance policies for over 30 years. I have talked to numerous experts and educated myself on all things life insurance related. But, at the end of the day, remember I’m not a life insurance agent or broker. I don’t work for any life insurance companies and have never had official training (other than the school of hard knocks). I am not giving you life insurance tips and advice. Rather, I am telling you my opinion and what has worked (or not worked) for me. I formulate my opinions based on my experience, mistakes, and research, and you should too! If you need a financial professional, you should consult one in your area.