The Mom Weekly Volume 34: March 26, 2024
Notes:
Quick request: I’m going to be writing an upcoming “money advice” newsletter on credit scores. This is based on a conversation I had recently with a younger relative about what goes into a credit score. If you have any questions about credit scores, you can hit “reply” to this email and I will incorporate it into what I write.
Also, remember how much I enjoy getting to answer money-related questions, so feel free to ask me anytime!
Today’s post is a slightly updated version of what I wrote for my personal finance website. The information is solid, and I’m happy I wrote it back then. Yay, 2021 Mom, for writing about this already!
The tl;dr is: keep things simple.
Remember above all that insurance is insurance. Insurance is not investing, funding your retirement, or anything else. Don’t mix it up!
Also? Long term, you don’t want your family’s finances to hinge upon someone not being alive. Life insurance is just for the years when it would be catastrophic to lose a spouse; in that case, life insurance protects your family.
Ideally, you would design your financial life so that your family does not need life insurance as soon as possible (i.e., save aggressively for non-working times, such as retirement.)
At some point, you will be glad that, even if you do still have term life insurance, your family no longer needs it.
Remember how much I love you,
Mom
The Purpose of Life Insurance (Mom’s Occasional Money Advice)
Should you get life insurance? If so, how much? What kind? How do you shop for life insurance?
Insurance—What it is
Insurance is a product that you buy—typically offered by a company—that pays you for things that are damaged, destroyed, or for events that occur.
You can insure just about everything: from your life, your home, your auto, your mobile phone, and even small things like a keyboard, a small appliance, and more.
When does (and doesn’t) it make the most sense to have insurance?
It makes the most sense to have insurance when you cannot easily replace or pay for. And not to insure things that are (relatively) easy to replace.
Here’s an example:
A couple of years ago, I purchased a $47 plug-in radiator/heater to use in a room that is colder than the rest of our house. (By the way, it works really well, and it makes no sound, as do air heaters. I highly recommend). When I purchased it at Wal-Mart, I was offered a $5 two-year “protection plan” to replace the item. That protection plan is insurance.
But that kind of insurance is not a good idea. Why? Well, for one, $5 is more than 10 percent of the purchase price of the item. If the item would fail within a year or two, I would likely contact the manufacturer, or I could easily replace the item. If I had the insurance, I would likely have to prove it somehow, and go through a lot of hoops to prove that the item failed, etc.
When is it a good idea to have insurance?
Let’s look at home insurance. Because a consumer cannot easily replace a house or its contents if there were a fire, a tornado, or some other loss, insurance is a good idea.
There is no cash value to the insurance, and you only have it when you have a need. People who do not own houses do not need home insurance. People who do not own cars do not need auto insurance.
If you sell your house and do not buy another, you could say that you have “lost” all that insurance money paid over the years. But we do not say that, and we do not consider it a “loss,” as the peace of mind knowing if something should happen was worth it.
You buy insurance for things that you cannot easily replace or for catastrophic events (such as death).
So, for example, if you own a home, you have homeowner’s insurance. For one, most mortgage providers require it. But even if your mortgage is paid off, you likely still have home insurance, because replacing a home and its contents would be prohibitively expensive for most people.
Auto insurance is for people how have vehicles, so the vehicle can be repaired or replaced if the driver gets into an accident. Auto insurance can also pay for medical bills stemming from accidents and cover you if you get into an accident with an uninsured driver.
What Does it Mean to Self-Insure?
Let’s go back to my plug-in radiator. Instead of purchasing insurance (the protection plan) for it, I “self insure” for the item. If the radiator failed, I could replace it or do without it. Neither would affect my finances or life greatly. Therefore, I do not need insurance.
This is not true for something like home or auto insurance. Even if state laws or mortgages did not require owners to carry home or auto insurance, it would still be a good idea.
A good rule of thumb: if the protection plan or extended warranty for an item is 5-10 percent or more of the purchase price, it’s not a great idea.
Who Needs Life Insurance
Figure out first if you need life insurance, and then shop around for the right kind for you—typically term life insurance.
The main group of people who need life insurance: Those who rely on their presence and/or income. So, for instance, a married couple with a child or children would want to consider insurance for both spouses.
And even if only one spouse works outside the home, both parents need life insurance.
Consider carefully if your situation requires life insurance, and if you do not need it, you do not have to purchase it.
Who Does Not Need Life Insurance
Who does not need life insurance?
*Those who are too young.
*Children. When the kids were little, it was common to get tons of offers in the mail for children’s life insurance. This may have gone online, but I hope the practice has disappeared!
Kids do not need life insurance. No one depends on their income.
*Those who do not have dependents.
You also do not need life insurance if you have no dependents. If you are a young professional, not married, and on your own, you do not need life insurance.
*Those who can self-insure.
If you are financially independent, you do not need life insurance. Even those without a huge “fortune” can still “self-insure.”
Kinds of Life Insurance
There are two major categories of life insurance:
Permanent Life Insurance
Term Life Insurance
What is permanent life insurance?
Permanent life insurance—often called “whole life insurance”–is like it sounds—it lasts a person’s whole life, meaning it has a cash value. It is basically a forced saving account for a death benefit. (And yes, since this is “mixing” saving and insuring, something I don’t like!)
Whole life insurance is typically much more expensive than term life insurance. It can be up to 10 times the price of a term life policy.
Whole life policies are often complicated. They can include penalties for leaving the policy early, rules for borrowing money from the policy, and more.
There is a place for whole life insurance, such as high net worth individuals or specific business circumstances. But term life insurance is a better choice for most people.
Advantages of whole life insurance
*it has cash value.
*if premiums are paid, the plan lasts for the life of the insured.
Disadvantages of whole life insurance
*very expensive—perhaps 10x as much in premiums as term life insurance.
*complicated in plan options (loans, death benefits, investments within the life)
*can have high fees and commissions that go to the insurance seller, unlike term life insurance.
I don’t think I can emphasize enough how complications and confusions of whole life/permanent life insurance make it unsuitable but just about everyone. But I don’t have to, because others have written about it, notably The White Coat Investor, Dr. Jim Dahle. (This is a solid source of information for “doctors and other high-income professionals”)
A recent post jokingly describes how bad this is as an insurance product, but the comments are particularly interesting.
If you go to the comments section (get out your popcorn, as one of the commenters said), you’ll see various whole life defenders (those who sell it and “others,” supposedly) make the (confusing) case for it. The White Coat Investor says this in one of the comments when someone talks about removing a non factual comment:
“Why would I remove it? It’s Exhibit A of what this post is talking about. I mean, sure, it’s highly likely to eventually go ad hominem, but those who sell whole life insurance inappropriately and I already have a long standing hatred of each other. They’ve cost doctors millions (billions?) and I’ve cost them millions (billions?) We’re not going to come to terms any time soon.”
Especially for people who are high earners, financial salespeople of various kinds will try to sell whole life insurance. But it’s almost always best to resist.
What is term life insurance?
Term life insurance is life insurance that lasts only as long as its term—typically 20 years and up. This is the type of policy recommended for almost all people who need or desire life insurance.
Term life insurance has no cash value. It covers only the term that you have paid out. So, for instance, someone might take out a 25-year term life insurance policy. As long as the insured continues to pay the monthly premiums, usually a fixed amount, the person maintains coverage for that time. After it is over, the person would need to take out another policy, or at that point be “self-insured.”
Advantages of term life insurance
*relatively inexpensive
*simple concept and operation
*typically, premium and benefit stays the same for the policy term
Disadvantages of term life insurance
*death benefit only lasts for the term (or length of policy)
*no cash value
For further reference, here is an in-depth newsletter on term life and related insurances from Chris Hutchins of All the Hacks.
He explains a concept called “laddering” term life insurance policies to make sure you are covered for a long enough time. He also describes why when you “research” life insurance, you will notice you get a lot of results showing that (not great) information about whole life insurance policies, because there’s more money in that.
How much life insurance?
The amount of life insurance you should get is very personal. Having a policy that you can comfortably afford is a priority, but so is the right amount of coverage for you.
One rule of thumb is to insure for 10 times your annual salary. So, for instance, if you make $50,000 a year, consider pricing $500,000 in life insurance. If you have children, some experts recommend that you increase that amount, but much depends on your comfort with paying a small amount of money for the term life insurance coverage.
Another, more generous calculation of life insurance amount tracks the benefit with 10x total household income. So, for instance, a couple with children, and a combined income of $75,000 could consider insuring each spouse for $750,000. This would provide extra coverage, and it is not a bad idea if it is easily affordable for you.
Key takeaways:
*Determine whether or not you are a good candidate for life insurance. If you are not because you either do not have a need, or can “self-insure,” consider not pursuing life insurance.
*If you need life insurance, contemplate how much you should look for. Consider 10x annual household income as a start. And both spouses should be covered, even if one has a lower income or no income.
*Check to see if your employer offers life insurance as a benefit. Some employers do, and this can be a good way to get covered for free. Some employers will let you add on more coverage, or add on a spouse, to the coverage.
Term insurance is the best choice for most people. It is the simplest and least expensive form of insurance to have, especially if you are relatively young.
[Note: even people with employer-sponsored life insurance may want to consider some term life insurance, since you cannot take employer insurance with you if you leave your job. Locking in a term insurance rate could be helpful for you. ]
What’s the best amount of life insurance? It’s personal, but start with 10x household income and adjust to your situation or budget. Both spouses should be fully covered, even a spouse earning a lower income or not earning income.
If you do get a term life insurance policy, plan to save enough in retirement accounts and elsewhere so that when the term of the term life insurance policy is up, you no longer need life insurance. That should be the goal.
If your children are grown and you are retired, you likely do not need life insurance, and since you are older, the premiums on any policy would likely be prohibitive. Are you comfortable with what you have? Do you have enough income (Social Security, pension, and savings, etc.) to cover your expenses? Have you made a plan and set aside money for your funeral expenses (at minimum)? You do not need life insurance.
Interesting/Notable
Brain Cancer Was Supposed to Kill Me. Instead, It Gave Me a Second Life
(NY Times gift link). Dad shared this with me. Very powerful.
The 1,000 World Celebration
You’ve probably already seen this special offers, but it’s fun to see.
An Action Item: Sign up for USPS Informed Delivery
I hope you have finished your taxes, because this week’s action item is something I’ve been encouraging (coercing) family members to sign up for it. Informed Delivery is a free service offered by the US Postal Service (USPS) to send you an email every day with photos of every piece of mail you will receive.
It is super handy, especially for those who might not receive much mail, or who have to retrieve it from a mailroom. I appreciate seeing the emails even when we are on vacation, so I know what to expect when we return and all that mail is delivered. (Interestingly, you still get emails, even when you have a vacation hold on your mail).
It is a relatively quick and easy sign-up.
If you don’t have a USPS account, you’ll need to create one. If you’re eligible for Informed Delivery (maybe kids at college might not be?), you sign up, and then I think in most cases you have to wait to receive a USPS letter in the mail. That letter, which usually arrives within a week or so, will include a code that you enter back at USPS.com, and then you’ll start getting the emails.
That’s it!
What are you doing this weekend?
So, now that it’s Tuesday, what are you planning for the weekend? Remember that this weekend is the Triduum, so Good Friday is a day of fast and abstinence. If you’re free Holy Thursday evening, you could make a visit to a church. And Easter is Sunday, yay!
I’m going to suggest trying to cover four “F”s to get ideas flowing:
*faith—when are you going to Mass?
*friends—what friends will you see or connect with?
*food—any fun recipes you plan to try, or restaurants you plan to visit?
*fun—anything interesting you are going to play, watch, or do this weekend? Now’s the time to think it through, and put it on the calendar (even informally).