Before we get into a few items to keep in mind while considering life insurance, you need to be aware that life insurance sales can be a very predatory environment. If it sounds too good to be true, it likely is, and you should run away as fast as possible (especially if the agent/website is touting the investment ability within the policy vs. your planning needs). 

Now that we got the fun stuff out of the way, let’s talk about the “why” to buy life insurance. If you have obligations, you should consider life insurance. What are obligations – think wife/kids/mortgage/auto payment/etc. The consideration is simple – would life insurance ease the burden on your family if you passed? If you are a wage earner or have kids at home, the answer to this question is usually a resounding yes! If you are already retired and don’t have kids at home, the need for life insurance is much, much lower and a more nuanced decision.

Here are a few simple guidelines as you venture into the world of life insurance. 

• Term coverage is the best option (99% of the time): Term life insurance policies provide a death benefit for a certain period of time (or term). The most prevalent are 10- and 20-year term policies. The rationale behind term policies is simple – buy coverage for the period of time that you are at most risk of losing your human capital and still building your financial capital (think first home, just had kids, etc.). Term policies can be very cheap and do NOT have any investment components. There can be very, very, very unique personal circumstances that make permanent life insurance worth considering, but they are very few and far between. 
• Coverage other than term: You may encounter terms such as whole life, universal life, indexed universal life, and various other terms created by the insurance industry the lure new buyers. The difference between these policies and a term policy is that they usually have some type of investment/dividend component and offer you the “ability” to retain the insurance policy for life. The issue with these policies almost always come down to transparency (or lack thereof) of fees vs. a term policy where you know exactly what you are paying and receiving. 
• How much insurance do you need? One of the best “back of the napkin” calculations is to take your salary and multiply it by 10. Make $100k? have at least $1 million of term coverage. Make $200k? consider $2 million. Term coverage tends to be very affordable when you are in your early to mid 30s, so I like to use 10 times salary PLUS the balance on your mortgage as a good starting point for the coverage you need. One final point here – this calculation works for couples where both are wage earners, if only one individual is a wage earner, you may want to go a little higher for the primary wage earner, but DON’T ignore insurance on the secondary wage earner, especially if they are caretaking for your children. While they may not have a high salary, they are providing significant value to your household and likely need some form of coverage. 
• Is your net worth held in liquid or illiquid assets? The last thing you want to do is force the sale of a business, farm, or property in order to meet the spending requirements for your surviving family members. Same goes for your business if you are a sole practitioner/proprietor as the value of your business may decrease significantly it something happens to you. 

Have additional questions about life insurance, schedule a meeting!

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Disclosure:

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

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