- Even with modern medical advances, 10 to 12 percent of today’s 30-year-olds will not make it to age 60.
- Term life insurance is just as important as health, auto and homeowners insurance when you’re raising a family and are in your prime earning years.
- Many young people are surprised to learn how much coverage a few hundred dollars a year in premiums can buy.
About 30 years ago, when I first started in this business, I remember encouraging a gentleman to get disability insurance. But he brushed me off, saying he was “insurance poor.” I later realized he meant that he thought the coverage was too expensive for him, especially since his business wasn’t doing well.
Today, it’s different. Automobile insurance and health insurance are critical, and homeowners insurance (protection in case of fire/theft) is essential if you own a house. If you’re working, you probably have life insurance equivalent to one year of your salary. Is that really enough?
I realize life insurance is an unpleasant topic since nobody really wants to contemplate their own mortality or pay for it. However, insurance becomes increasingly important as you go through life. If you’re single and working, it may not be a high priority because if something happens to you, you’re pretty well taken care of. If you’re married or living with someone, insurance becomes a little more important since you’re looking at bills that both you and your partner share for autos, student loans, your home, etc. Things really change once you start having children, because no one wants to leave this earth without providing for their kids.
So how much insurance do you need? There are two major categories:
- Income replacement. Here you calculate a lump sum amount equivalent to your annual salary times a certain number of years.
- Additive. This is for paying off key loans—auto, home and student loans—so your family isn’t saddled with debt if you die prematurely. It’s also for taking care of the cost of raising a child, which, according to the U.S. Department of Agriculture, averages $250,000 in the first 18 years.
Let’s take a 30-year-old male in good health. A good start is to buy 30-year level term insurance. This means you pay a level premium every year for 30 years, and the death benefit stays the same. So if you die anytime between age 30 and 60, the claim is the death benefit.
Term life is not that expensive. For the 30-year-old healthy male in our example, $400 a year in premiums typically buys him a $500,000 policy. For $725 a year, he can typically get a $1 million policy. Why did we look at a 30-year term? Because typically by age 60, many folks have raised their children and have paid off mortgages, student loans and other long-term obligations that no longer have to be insured against.
It’s worth thinking about since roughly 10 to 12 percent of today’s 30-year-olds will not reach age 60, according to the Social Security Administration—that’s roughly between one in eight and one in 10.
Given the stats and facts above, there’s no reason to be “insurance poor” at these low-level premiums.
Until next time, enjoy. Gary