Read The 9 Steps to Financial Freedom Online
Authors: Suze Orman
The 9 Steps to Financial Freedom (14 page)
Don’t put this step off. The moment you need to do this document, it’s too late to create it.
LIFE INSURANCE
Life insurance was never meant to be a permanent need. Its original purpose was to protect people while they were younger, before they had a chance to build up a nest egg, in case the family breadwinner died early and unexpectedly. If the breadwinner
lived his or her life according to plan, however, the family would accumulate enough assets to make itself safe and then let the insurance go.
Today, however, a huge industry exists to sell you as much insurance as it can, whether you really need it or not.
I know how the industry works, because I was a licensed insurance agent, and I know the workings of most policies inside out. I also know how the commissions work. If you knew how large those commissions on whole-life policies really are—often 80 to 90 percent of the first year’s premium—you would know why people say, “Life insurance isn’t something you buy. Life insurance is something that’s sold to you.”
If you’re single and have no dependents whatever, you can skip this section, because there’s no need for you to have life insurance at all. However, if you have people who depend on the money you bring in with every paycheck, there is information here that is essential for you to understand. The four questions to ask yourself about life insurance are these:
Do I need it?
If so, how much do I need?
If so, how long will I need it?
If so, what kind of life insurance policy do I need?
Question 1: Do I Really Need Life Insurance?
You’re a single parent with two kids, and you die unexpectedly. Or you’re married in a two-income household, and your spouse is killed in an accident. Whatever your own family circumstances, would those you left behind be able to carry on financially?
Back in Step 3 you compiled a list of all your expenses. Now is the time to review that list and see how much it would change if your children were suddenly parentless or if you or your partner were to die. Fixed expenses would remain the same. Some expenses would decrease. Some would increase—long-distance phone calls to friends for comfort, eating out so you wouldn’t be so lonely, entertainment. Would your child-care situation change? What about the future financial goals you had—paying for the children’s education, for example? Could you still cover that? What if you or your partner had to stop working as well? How would you cope? How much would it really take? How much do you really have?
Now compare the hypothetical money coming in against the hypothetical money going out in this scenario and any other scenarios you can imagine. What impact would a possible death have on the money coming in? If your survivors would have enough, then you do not need insurance. You may still want some for peace of mind, but you don’t need any—and there is a big difference between needing insurance and wanting it.
If your loved ones would not have enough, then you know you need insurance to protect yourself and them.
Question 2: How Much Life Insurance Do I Need?
Most people think, “Oh, all I’d need is enough to get my family by for just a little while.” As a result, they usually have the $50,000 or so worth of insurance that’s part of their benefits package at work, and feel that is enough. But since an unexpected tragedy affects people in different ways, you never know for sure what might happen after you are gone. That’s why this is a decision which must take into account every tragic possibility, and must be discussed with the people who would be affected by it. All the questions must be asked. Do they feel comfortable knowing that they have enough money to
get by for a year, or two, or eight? Many experts will tell you to purchase six to eight times your annual salary, but experts are not the ones who have to live your loved ones’ lives. Maybe in your situation you would rather know that everyone will be okay no matter what, even if no one is able ever to work again. Maybe you want your children to be provided for more than ten years, rather than just eight. There is no magic formula. Each of us has our own financial what-if comfort level. The final decision is a balance of what makes everyone concerned feel secure and how much you can realistically afford to pay for that security.
As a rule of thumb, figure you need twenty to twenty-five times the annual income your family or dependents rely on you for. Why so much? The goal with life insurance is that your dependents could invest the payout on your life insurance policy—called the death benefit—conservatively and live off the income without having to use the principal. So, for example, if your family relies on your $75,000 income, I would recommend you consider a life insurance policy that has a death benefit of at least $1.5 million ($75,000 × 20). With that sum, your beneficiaries could invest the proceeds in municipal bonds paying 5 percent or so and the interest payments would generate the $75,000 of income they would need. I recommend this conservative approach so you can give your dependents the best sense of security. If your death benefit is small, say just a few years worth of their income needs, they will likely use up all the money very quickly. Giving them the ability to live off the income generated by a large death benefit is indeed an incredible gift you can bestow.
And as I will soon explain, if you buy the right type of life insurance you can indeed afford a policy with such a large payout.
Question 3: How Long Will I Need Life Insurance?
Remember, life insurance was never intended to fill a permanent need. As the years go on, the money that you are putting away in your retirement plan (see
Step 5
), that you may be accumulating on your own, and that you are accruing in your home as you pay off the mortgage will continue to change how much insurance you really need, or whether you need it at all. One of the goals of this book is to make sure that by the time you are retired, you’ll have enough coming in from your retirement plans to support you—and support your loved ones after you’re gone. Once you have enough to live on in this way, most likely there will be no need for life insurance. (However, never, never cancel or attempt to change a policy without checking with your doctor and having a thorough physical. If there’s a medical reason, you may want to keep insurance you otherwise would not have needed.) Bottom-line goal: By the time you are sixty-five at the latest, your need for life insurance, and your need to pay the premiums on your life insurance, should be gone.
Question 4: What Kind of Life Insurance Do I Need?
In my opinion there is only one kind of life insurance that makes sense for the vast majority of us, and that is term life insurance. When you sign up for term insurance, you’re buying a just-in-case policy for a finite length of time that you need protection. Term policies are not very expensive because the insurance company knows you have relatively little chance of dying while the policy is in force. Most likely they won’t have to pay a death benefit, and the premium is accordingly relatively small.
With a whole life or universal policy, on the other hand, the insurance company knows it will almost certainly have to pay the face amount or the death benefit. You’re expected to die with it.
So they price it accordingly. It’s true that whole life and universal policies have cash values, so if you decide not to keep it, or if you suddenly need money while you’re alive, one source would be the cash value of these policies. But commissions on life insurance policies are some of the most lucrative commissions in any business—and
you’re
paying them. If your goal in buying life insurance is to put money aside, there are far, far better ways to do so without having to pay these kinds of commissions, as we’ll see in the next chapters. With low-cost term insurance, even though you do not accumulate a cash value, you’re paying low commissions on the protection you need, for as long as you signed up for.
When money is an issue, though, as it is for most of us, we don’t always have the luxury of buying enough life insurance to assume the worst. With most people there’s almost always a discrepancy between the maximum of insurance wanted and the minimum of insurance needed. Your needs, comfort level, and what you can afford all have to be taken into account. If you’re using a professional to help you figure this out, make sure he or she has your needs and pocketbook in mind and isn’t just thinking of all that the commissions will buy. I would suggest that you’re better off trying to figure out how much insurance you really need and can afford, then calling the following numbers to get quotes to compare the best-priced policies. Here are the numbers and Internet addresses of leading term life insurance quote services:
| AccuQuote | Select Quote |
| 800-442-9899 | 800-963-8688 |
| http://www.accuquote.com | http://www.selectquote.com |
InsWeb
916-853-3300
The agent was so nice, Linda thought, and he was selling something she thought she needed.
I’ve always had it in my head that I want my kids to have insurance when I die, and $1.5 million is the figure I always thought sounded right. I have a comfortable income from my work—in fact, I was the one who paid the settlement in my divorce—but I have no savings, really, and the income will stop when I die. The kids don’t really see their father, and he has children from his second marriage, so this is all they’d get, ever. My father always said life insurance was a great way to save. I always remembered that. I finally got around to it three years ago—I was fifty-three.
The agent was so nice. He came all the way to my house, which is way out of town. On a Saturday! I was so impressed. When he came, I told him what I wanted and he had his computer with him, so he did the figures right there. He said it would be $22,500 a year for twenty years and that was that; the kids would have their money. In my head I added it up. It meant that I’d be putting in $450,000, and they’d get $1.5 million—a good deal, no? So I said fine, and every June 1 since, I’ve sent in my $22,500.
This last year, though, I got a notice that said since interest rates have been so low, I would have to pay the $22,500 for an extra three years to keep the $1.5 million death benefit, and if the rates stayed this low or went lower, I might have to pay longer. I called up the agent, and he said that it is possible, even though it isn’t probable, that if interest rates didn’t pick up, I might have to pay that money for quite a while longer than I was told. The best that could happen is that I’d have to pay it for twenty-three years in total. But I think he was saying that I might just have to go on paying it forever.
Had I known that, I would have thought twice about this. It just doesn’t seem right. I asked him what if I stopped now and cashed in the policy, how much would I get? He said $36,000. But I’ve already paid $67,500! I got so confused. He had told me the same thing my father always said, that this was a great place for saving money, regardless of the insurance, because they were giving a guaranteed seven percent interest rate. So how do I end up with only $36,000? And what do I do now?