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Life Insurance, Part of a Comprehensive Financial Plan

by Ryan Guina

What is the first thing that comes to mind when you think about financial planning? If you are like most people, it probably has to do with budgeting, or investing. Yes, both of these are fundamental parts of our financial planning. You can’t win at the financial game if you don’t follow the basic art of spending less than you earn (budgeting). Likewise, you won’t become wealthy, much less keep up with inflation if you don’t invest your money. Tracking your expenses, managing your spending, practicing proper asset allocation – these are all essential. And so is life insurance.

Life insurance - part of a comprehensive financial planIt’s great to pay attention to the little things when it comes to money. But you also need to make sure you take care of the big things. The most valuable asset you have isn’t your bank account, your 401k, or your Roth IRA. It is the ability to create income. The single biggest financial risk many people take is the failure to protect this asset.

There are two ways you can protect your ability to create income: long-term disability insurance will help you if you become incapacitated and are unable to work. There are limits, to these policies, but they are worth looking into. The next way to protect yourself and your family is by purchasing sufficient life insurance.

Who Needs Life Insurance

Everyone. OK, maybe not everyone – but almost everyone. We laid out a more detailed article regarding who needs life insurance. But a good rule of thumb is that if your income is used to support someone else, then you should have enough life insurance to off set the loss of your income and any additional expenses that may arise from your passing.

What about DINKs? There are many people who say you don’t need life insurance if you are a dual income no kids family. The rationale is that the surviving spouse should be able to provide for his or herself because he or she would still be able to work. Unfortunately, that logic is flawed in many cases. Many couples live on both salaries and a surviving spouse may find it hard to continue making mortgage or loan payments on only one income, especially if they were the one who earned less. Many debts can also pass on to the surviving spouse, depending on state laws. You also need to consider the possibility or large medical bills or other expenses related to a death and burial.

What about stay at home moms? Stay at home moms contribute to the household finances, even if they aren’t bringing home a paycheck. They take care of children, housework, cooking, cleaning, etc. Every year the national media puts together the “salary” of a stay at home mom based on their household contributions. It is always in the six figures. Think about it another way. Imagine you are the primary bread winner and your spouse stayed at home and raised your children. What would happen if he or she died? Would the children go to day care? Would you eat out more frequently? Could you afford to pay for any associated medical or burial costs?

Do retirees need life insurance? Yes, and no. If your house is paid off, you have no consumer debt, you have enough investments and other assets for one or both of you to make it through the rest of your life, then you may be fine without a life insurance policy. If you still have a mortgage or any consumer debt, then you might want to consider a life insurance policy that is large enough to satisfy these debts. Here is more on this topic.

Should you insure your children? This is another highly contested topic. Many people don’t think you should insure a child’s life. After all, most children don’t contribute to the family income, and the thought of profiting from a child’s death is morbid. I can understand why people may feel that way, but there are times when it may make sense to insure a child. I took out a life insurance policy on my children. Why? Because it only costs me $2 a month per child for $20k in life insurance. If my child dies, the money from the policy would be enough to pay for funeral expenses, and hopefully a portion of any medical expenses which may occur. The other benefit is that my children will be able to take the policy with them when they turn 18, regardless of whether or not something happens that would otherwise label them as uninsurable. It’s not a huge policy, but it’s enough to make me feel better. And that is what insurance is all about, right?

There is No Time Like the Present

In most cases, it is cheaper to buy life insurance when you are younger (and healthier). If you have some life insurance, great. Review your plan and make sure you have enough. If you don’t have enough life insurance, take a few moments and get a life insurance quote or see if you can get a policy through your employer. Here are some places where you can get a free, no-obligation quote on a life insurance policy:

Life Insurance Company
Notes
Click for a free quote
Mint.com Life Insurance WizardThis tool helps you learn how much life insurance you need by examining your age, income, dependents and more. Then they give recommendations based on your inputs. Click to Start Your Quote
Efinancial.comGet life insurance quotes from multiple providersClick to Start Your Quote
USAA Life InsuranceUSAA life insurance is only available to USAA members. Click to lean more about eligibility.

Click to Start Your Quote
US Insurance OnlineGet life insurance quotes from multiple providersClick to Start Your Quote

Life insurance is one of the most essential parts of your financial plan. Please, for the love of your family, make sure you have enough. This article is part of the life insurance movement, a gathering of financial writers sharing the message about the importance of life insurance.


Published or updated August 21, 2012.
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{ 9 comments… read them below or add one }

1 Roger @ The Chicago Financial Planner

Excellent post Ryan, you make some very valid points. I look at life insurance and the need for it for every client, it is an essential consideration in a comprehensive financial plan. The online tools are an excellent way for your readers to begin to do some comparison shopping as well.

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2 Ryan Guina

That’s a great service you do, Roger. I’ve met with a few financial planners, and none of them asked me even basic questions about my life insurance policies (the topic was never even discussed). They just jumped right into “what are your financial goals?” listened for a couple minutes then jumped into their sales pitch. It was actually disheartening to be fed a one-size-fits-all “financial plan.”

Granted, that was only a small sample size. Hopefully more financial planners take your approach!

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3 Roger @ The Chicago Financial Planner

Ryan thanks. I can’t tell you how many calls I’ve received from younger guys (not to be sexist but this conversation usually occurs with males) who are all amped up to invest and perhaps buy some rental property, etc. I think this is fantastic. But I always ask (assuming they are married and have kids) about a will naming a guardian and life insurance. More often than not I think you can guess the answer. I think earlier this year I actually scared one prospect off by lecturing him about this topic. Though I did email him some local estate attorneys, I think I may have come on too strong with this guy. I do feel very strongly about this topic, how easy is it to go on “date night” with your wife, the kids are with a sitter, and a drunk driver ends it all? Chilling, but this is why younger couples especially need to ensure they have adequate life insurance and at least a valid will with a named guardian in place. Sorry, end of soapbox.

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4 Ryan Guina

I agree, 100%, Roger. Investing is the “sexier” topic, but it in my opinion, you need to have the basics in place, and that starts with life insurance, estate planning, and similar topics. I rest easy at night knowing that my wife will be taken care of financially if anything happens to me.

My wife and I do need to update our estate plan, though. We haven’t done that since our daughter was born 6 months ago. I think now would be a good time!

5 Cherleen @ My Personal Finance Journey

Great post! One of the things that work-at-home moms and dads overlook is life insurance. Some of them think that they are less prone to accidents that may cause untimely death or such. Well, we do not know what is waiting for us on the other end of the line. We used to have a life insurance from our employers, but now that we have gone freelance and running our small business, we have been considering to get one; thus, we are also looking for a good provider. Thank you for sharing the sites.

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6 Ryan Guina

Cherleen, you just described one of the downfalls to buying life insurance through an employer. It can often be a good deal in terms of price, but there are a couple limitations people should be aware of. The first is that you can’t take it with you when you leave. Most employees change jobs every couple years, so this presents a problem when they leave their job. The other issue is that life insurance payouts through an employer are often tied to salary (such as 2 or 3 times annual salary). This may not be enough for many people. It’s not a bad idea to decline it if you can get it at a reasonable enough price, but it should only be a supplemental plan for most people.

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7 Daisy@Everything Finance

My partner and I are DINKS but at the moment, we do not rely on each other from a financial perspective. We rent a cheap apartment (that we would definitely be able to afford alone if one of us passed away), and we don’t have children. We have investments that would go to one another should one of us die, and life insurance through my work that would allow my partner to retire early should he want to at the rate we are going.

However, when we buy a house, we will certainly be paying into life insurance. We will definitely be depending on each other’s incomes.

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8 Hadley

I think life insurance is one of the most important tools of a financial plan for a young family. If you have kids, a home and are planning for the future, a life insurance policy for both parents can go a long way to providing the financial security your children and surviving spouse will need in case you die. While you are young and healthy is the right time to purchase life insurance because you can lock-in an affordable rate for up to 30 years with term life, or choose permanent life insurance to provide lifetime protection for your family. We purchase both once we were expecting our first child, even though we both had group term life insurance through our employers. That way, you are guaranteed to have life insurance even if you lose your job or are out of work for awhile.

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9 Mike

The mention of the retirees brings to mind using life insurance for pension maximization. There aren’t many people with pensions anymore but using a good life insurance policy can help people get a higher monthly pension check.

Essentially you take the life only option and then buy a life insurance policy to make sure the surviving spouse gets an income for a certain amount of years.

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