Sorry that my posts have become more terse and less frequent.? A large part of that was recent computer troubles, which have largely been rectified.? I highly recommend the program and advice on this webpage if your computer is running slow.? Beyond that, I have had internet outages (thank you Verizon), and my efforts at obtaining long-term investors for my strategies have eaten up a lot of time.
Tonight’s post deals with life insurance.? My main advice: buy what you need, not what someone wants to sell you.? What most people need is protection for their loved ones from untimely death, which can be satisfied by term insurance.? Now, some wealthy people with complex estate planning needs can benefit more from other forms of life insurance, but that’s not common.? Also, people who aren’t so healthy can benefit from permanent insurance through an agent, because that may be the only way that they can obtain coverage on a reasonable basis.
Why do I favor term insurance?? It’s cheap.? It’s cheap because it is easy to compare the features of various policies against each other to find the best price.? But what if some company that is lower quality offers the best price?? The state guaranty funds stand behind the insurance companies, and no one has failed to receive a death benefit on a timely basis as a result.? (Note: agents are not allowed to tell you this, because the states don’t want lower quality companies to gain a marketing advantage by mentioning the guaranty funds.)
Term insurance offers another advantage: re-underwriting.? If after ten years, you are still in good shape, and you still need insurance, apply for a new policy at a lower rate over the same remaining term as your old one.? If you can get one, buy it and cancel the old policy.? If your health is not so good, keep paying premiums on the old policy.
Where do you buy the insurance, then?? Google the phrase “term insurance,” and a variety of comparison services will pop up.? Try a few of them, and buy from the cheapest.? The younger you are, the longer the term you should buy for, because the far-out years are cheaper.? The older you are, stick to ten years at most.
A few final points: don’t buy policy riders; they are an expensive way to obtain insurance.? Also, don’t buy convenience insurance policies that offer token amounts of insurance; they are expensive also.? Last, don’t scrimp on the amount of coverage.? Few people are overinsured when it comes to life insurance; 5-10x your salary is pretty standard, but analyze how much your loved ones will need in your absence, and buy that much coverage.
I hope you got your buy order in on RWT. Reaffirmed regular dividend, declared $2.00 special dividend.
David, where does the 5-10x rule come from? I hear some people saying 8x. And why does ones’ salary at the time of the policy purchase play such an important role? Doesn’t it matter if salary is stagnant, or increases at inflation, or inflation +5%, based on age, career path, etc.?
Seems to me that looking at your *liabilities* would make more sense. If I died unexpectedly, my wife and our 3 and 5 year old kids would have major changes in their lives. No amount of life insurance will alter that emotional or financial reality. So we’ve bought enough term insurance to cover paying off the mortgage, plus a year’s worth of income. We’d rather save or spend the dollars that might go to more premiums for more or more costly insurance.
Insurance needs have to do with the individual person. While having “rules” can be nice for rules of thumb, not everyone is a thumb. Thanks again for a good post!!!
As I said, “…analyze how much your loved ones will need in your absence, and buy that much coverage.” Yes, that’s liability-based, and the correct way to do it. Liabilities often bear some ratio to income on average, thus the “rule of thumb.”
I agree with all the comments on personal insurance. Tangentially, I’ll add that I wish the industry had more incentives to design products with the idea of primarily meeting catastrophic needs in a given category. Counterexample 1, “dental insurance” – it pays for small, relatively affordable problems, but not for big ones. Counterexample 2, homeowner policy exclusions – e.g. if you thought earthquake insurance would be cheap and easy to get in an area without a lot of earthquakes, you’d be mistaken.
Any decision about insurance will be personal; but I would ask this question. How comfortable are you having your wife be a single mother (paid for home) with two young children (assuming social security collection) in terms of how they will live. I guarentee having one year of income in the bank plus paid for house will not significantly reduce money problems looking at it from this perspective; monthly bills; daycare versus employment decision; how are you going to pay for college; how cheap do you want to live; strict budgeting; etc.?
There are no perfect answers to this; FWIW I have a term insurance solution that is based on the logic of 5% of the portfolio per year as an income replacement (plus Soc. Sec). This can use a “balanced investment approach” which david has discussed on the blog. This is in addition to home paid for; college paid for; and extra savings based on my own efforts; so in effect my wife and family (4 kids) have a life time income solution. The extra premium probably was $300 per year for $1million versus $500K coverage.
FWIW I have retail clients and work with two widows with young children; believe me no one works as much as they thought; they spend more; and I sweat mistakes because I can’t use the balanced approach that easily.
I’ll also say this; there is a lot less emotional trauma if you don’t have money worries; 5 years later money problems will make it tough for your spouse to even remember the good!
My opinions only. The blog is great and I hope my observations useful.
Great discussion. Thanks, David for kicking it off.
Paul in KC, I think I just have a different perspective on college costs. If our kids can get into college and want to go, then I’m all for it. But I think college is a good return on your human capital — your post-college salary will be more, and lifetime earnings much higher. That suggests that (big surprise) EDUCATION IS A GOOD INVESTMENT. Therefore, we shouldn’t be afraid to borrow (ie use leverage) on an investment with a good risk/reward ratio. In fact, I wish we did away with subsidizing something that people would pay for anyway (college) and re-direct those education subsidies to things like improving the electrical grid, maintaining bridges, screening cargo for dirty bombs, etc.
So I don’t want to purchase life insurance to pay for my kids’ college. I agree with the rest, such as budgeting for day care, etc.
I agree; this are all personal issues; the only reason I would not want my kids to borrow is i would rather have them start off with a better capital position. My grandparents helped me so that is how I repay them; that being said getting your child to value the gift and not squander it is a whole other battle!! FWIW MY 15 year old and I have been working on this; he gets to “keep the money” that he does not use; it’s starting to sink in that it takes a ton of work to save $1,000; so every dollar not spent saves years of effort! We’ll see if this works lol.