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Q: My wife keeps telling me that we need to get some life insurance, especially since we just had our first baby. Before talking with an agent, how should I really be thinking about life insurance?
First, as a fee-only wealth manager who doesn’t sell financial products and doesn’t earn commissions, the advice I’m about to give comes with no ulterior motive.
My belief is that insurance, in general, should be seen first as a tool to manage an identified risk in your life. You should remember this point when you are considering insurance for any other purpose, such as an investment vehicle or as a speculative gamble.
From your question, it appears your identified risk is your family’s loss of your future earnings. As you’ll likely see again in life, your wife is right to worry about this type of thing. You should probably interpret this life insurance topic as a compliment rather than as overly morbid.
Given the lower cost of term insurance — that is, a policy that only lasts for a specific period of time — you really shouldn’t hesitate to get a policy. I prefer term life over policies that also act as forced-savings or investment products, such as whole or universal life.
The simplicity of term insurance effectively addresses the identified risk at hand — the loss of your earnings. To make sure you’re properly insured against this risk, you’ll need to estimate the value of your future earnings as well as the value of your current liabilities. That isn’t always so simple to do. Everybody’s situation is a bit different. For example, if your wife doesn’t work or the potential for her to earn much money just isn’t there, then obviously your future earnings are critical to her.
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As a broad rule of thumb, the amount of coverage should probably be around 20 times your family’s estimated loss of income. For example, if you make $50,000 per year, it wouldn’t be outrageous to take out a policy for as much as $1 million.
Remember, however, your family’s risk of losing your earnings only lasts as long as your career does.
Over time the risk of that loss declines through the combination of (a) your building retirement savings, (b) your naturally declining liabilities — grown kids and a shrinking mortgage — and (c) your ever-advancing age. Eventually, the financial risk of losing you just disappears completely. At that point, you’ll no longer need life insurance.
So, go ahead and call an insurance agent for that review. You’ll be surprised at how affordable term life really is and how much peace of mind it will give your wife — and you, of course!
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Jason P. Tank, CFA
Front Street Wealth Management
310 W. Front Street Suite 411
Traverse City, MI 49684
ph: 231 947-3775
Front Street Wealth Management is the independent, fee-only, fully-discretionary wealth advisory firm for individuals, families and trusts who value proactive management of their investments and a deeper confidence in their wealth.