Life insurance is mandatory for financial wellness. It is put in place to replace lost income in the event of death. There are 2 basic types of insurance: TERM LIFE insurance and CASH VALUE/WHOLE LIFE insurance. I steer clients away from cash value plans and towards term life plans.

Term life insurance provides life insurance coverage for a specific amount of time. If you or your spouse passes away at any time during this term (usually 20–30 years), your beneficiaries (those you’ve selected to inherit your money) will receive a payout from the term life insurance policy. The premiums on whole life insurance (sometimes called cash value insurance) are generally more expensive than term life for a couple of reasons. Whole life insurance costs more because it’s designed to build cash value. But keep in mind that a life insurance policy shouldn’t be an investment or money-making scheme—it’s simply meant to provide security, protection and peace of mind for your family should the unthinkable happen.

In the case of cash value insurance, most of the premium is drained into commissions and fees for the first 3 years of the policy. The cash going into the savings part of the policy earns about 1%-2% interest. The worst part: the savings that does manage to build up after being ripped off for years won’t even go to the family of the insured when they pass away! The only benefit left behind is the face value of the policy.

Typically, I coach clients to have 10-12 times their annual gross income of term insurance in place at least long enough for children to be grown and out of the house in either college or the workplace. Another way to put this is that you can try to figure out how much the household will have to deal with in terms of expenses each year, and multiply that by the number of years you’ll need coverage for. This is a fairly straightforward way of doing life insurance calculations.

Another advantage of term insurance is that the premiums are very affordable and the consumer is only buying the insurance they need and directing their savings to a proper investment tool. Insurance is a basic part of financial wellness that should be in place to replace lost income in the event of death. Do your homework and try to find an agent who is a NON-CAPTURED AGENT who is free to search for the best plan for you.

Jeff Tucker
Lighthouse Financial Coaching is an Austin-based company dedicated to helping regular families and individuals become organized with personal finance and begin to win with money and move forward to achieve their financial dreams and goals. Schedule your free introductory consultation today.
Phone: (512) 971-6739

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