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Why I Bought More Life Insurance

Written by Neal Frankle - 3 Comments

Why I Bought More Life Insurance

Do yourself a favor and re-evaluate your life insurance needs every few years, or whenever there have been significant changes in your personal situation. You’ll sleep better at night, and so will your family.

I just updated my financial plan and realized that I need more life insurance. Even though I’m a financial planner, I was surprised because I went through a thorough evaluation of insurance needs just five years ago.

But when I reviewed my current situation, I realized that the “facts on the ground” have changed. Like everyone else, my portfolio didn’t do as well over the last 5 years as I had hoped. As a result, my net worth isn’t where I thought it would be by now. When I started being self-employed, I had to get my own coverage. I bought my first policies based on:

a. How much it costs to support my family.

b. How much my family would have to invest in order to replace that support if I get hit by a bus.

c. How much we have saved so far.

I determined how much life insurance I needed by subtracting “c” from “b”. (Had the cost of supporting my family gone up, I would have factored that into the calculation as well.)

There’s another issue that came into play as well. When I first bought life insurance, I bought cheap term insurance that would expire in 2017. I figured that my net worth would be large enough to “self-insure” by that time.

I may still reach that goal but, the way things look now, it will be much more difficult. And what happens to my family if I don’t reach that goal before my insurance expires? I still have the responsibility to take care of my family in case a piano falls on my head.

In other words, not only did I need more life insurance, but I needed it for a longer period of time. That’s why I bought a new policy.

How do you apply this to your situation?

I strongly encourage you to re-evaluate your life insurance portfolio as soon as you can – especially if you haven’t done so over the last few years, or if your situation has changed quite a bit. Here’s the process:

1. Do you need life insurance?

Life insurance is a tool – not an investment. That’s why I like term insurance. You only need life insurance if others depend on your income. If you are retired and your spouse’s income would not suffer in the unfortunate case of your untimely demise, you don’t need life insurance (unless you have an estate tax problem ).

2. How much life insurance do you need?

There are many fancy calculators on the web that will tell you this, but let’s figure it out for ourselves.

Say you have (evil laugh) $1,000,000 and you want to create income from that money. You figure that, over many years, you could invest that money and earn, on average, 5% on it — or $50,000 a year.

I realize that you can’t get that kind of interest from a savings account, but there plenty of ways to generate income from investments other than by sticking it in the bank. We’re also talking about investing that $1,000,000 over a very long period of time, so earning 5% per year (on average) over many years isn’t unreasonable.

As it happens, you need $50,000 to support your family, so you’re happy with your situation. If your family doesn’t have you to generate the $50,000 that they need, they could your $1M nest egg to generate the income.

See also:How much life insurance do you need?

You might be thinking about inflation, and that’s an important issue. To address inflation, you really need to break out a calculator, though you might be able to get away without one. Here’s why:

On the one hand, the cost of living is certainly going to continue to rise. That means you may only need $50,000 to support the family now but it will cost a great deal more down the road. That’s true…

But on the other hand, the as time goes on, your family should need less support. Your kids will be older (meaning your expenses should decline), and your savings will grow. So the reduced expenses coupled with increased savings may cancel out the inflation problem.

Also, depending on the details of your portfolio and the withdrawal rate that you choose, you might be able to build cost-of-living increases into the amount of investment income that you devote to living expenses.

Ultimately, it’s very difficult to know exactly how much insurance you’ll need because the variables that change all the time (inflation rate, investment results, spending levels, and so on). That’s just another reason why you’ll benefit from re-evaluating your life insurance needs every few years.

How long has it been since you re-evaluated your life insurance needs? If you’ve done so recently, what did you learn? Did you have the right amount of coverage? Too much? Too little? If you haven’t double-checked your coverage, what are you waiting for?

Published on February 17th, 2011
Modified on February 19th, 2011 - 3 Comments
Filed under: Insurance

About the author: is a Certified Financial Planner in Los Angeles whose goal is to help people improve their finances and find balance in life. He covers these topics at his personal blog Wealth Pilgrim.

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3 Responses to “Why I Bought More Life Insurance”

  1. 1
    Emily Says:

    DH and I used pretty much the same principles to assess our insurance needs.

    And for anyone tempted to buy universal life: it is only worth it if you can pack away several thousand $$ per month into it. And then, you still probably would have done better to buy term life insurance and invest in mutual funds.

  2. 2
    Sandy @ yesiamcheap Says:

    Thank you for listing #1! I wrote a post entitled “Why I Don’t Have Life Insurance and Why You Might Need It” because I know that I don’t need life insurance. I have no spouse and no one is going to miss my income. My house is paid for in cash etc. etc. I don’t need it, but I have some through work.

  3. 3
    Meghan Says:

    Term Life is awesome for short term goal, things like mortgage protection, income protection, and children’s college education protection.. but has anyone thought about the long term goals- funeral and final expense protection? Of course if you live to 100 and your children are grown and out of college and your family doesn’t need your income anymore to continue living the same lifestyle, the need to term insurance decreases. But have you ever thought about who’s going to pay for your funeral? Death is inevitable, the question is WHEN. Do your family a favor and invest in enough whole life (NOT UNIVERSAL) before it’s too late- life insurance premiums are determined on your age, health, and lifestyle as of the day you take them out- or too expensive.. to guarantee that your funeral and final expenses will be paid for, so your family doesn’t have to come up with $20K-$30K out of nowhere while they are already dealing with enough stress due to your loss.

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