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Why do we need life insurance? How much should we have? What type of life insurance do we need? So many questions, yet for many life insurance is confusing.
Life insurance is for the living, the surviving beneficiaries, such as children and a spouse are most common. How much you need is more subjective and often is where many so-called experts miss the target. Too often they use general rules of thumb that seldom make sense or provide detailed plans. Most say life insurance is to replace lost income, this is only half right. When purchasing life insurance you must have very defined reasons and detailed instructions for the beneficiaries, otherwise this money is gone in a flash and wasted quickly, guaranteed! The general “misguided” rule of thumb is ten years’ worth of income which is very misleading, leaving the door wide open for misuse and waste. This is not a plan, but a recipe for failure and financial disaster for the survivors.
Life insurance must have a defined purpose and detailed plans for the surviving beneficiaries. Otherwise this money will be spent in short order on frivolous things.
To hand someone ten years of income in one check without detailed instructions, would be like handing a child candy and expecting them to not eat it immediately.
A detailed plan for the money is the first step that must be completed before you ever purchasing life insurance, this can be done in a will. Examples: For a young family paying for children’s college is a priority. Making sure the family has a place to live, so paying off the mortgage is a priority. Paying off vehicles and other debts is a priority. Paying for education or career training for the surviving spouse maybe a priority. The last thing on the list, not the first but the last, is providing income for a defined period of time for the surviving beneficiaries, not a lifetime of income, but several years’ worth. Give the surviving spouse, or beneficiaries an incentive to realize that sitting on the couch watching TV all day isn’t in the plans, this money will not last forever.
The last question of what type is fairly easy. For 90% of American household’s level term life insurance is what you need. Do not let the insurance sales-friend or salesmen tell you that you need a special wiz-bang policy with many moving parts that you don’t understand. They will always try and sell you a policy that earns them the largest commission…guaranteed! Simple level term life insurance is what you need, if the salesman won’t listen, or continues pushing something you don’t understand, walk away. Level term life insurance is usually a 10, 20 or 30 year level premium policy. The monthly or annual premium paid doesn’t change for the term of the policy. After the term expires the policy ends.
Life insurance is not an investment product, its life insurance. The other products, the one’s you don’t understand are for high income households, not for 90% of American households. Level term life insurance is relatively inexpensive and you will get much more financial protection for your dollar. Don’t let the salesman convince you that you must have life insurance until you are 100 years old, you don’t.
Your fist plan of action if you don’t have life insurance: Layout a detailed plan of what you want your life insurance to do for your surviving beneficiaries after you are gone, a detailed plan!
Phillip Day, President
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