Protection Versus Savings

Insurance is one of those necessary expenses that none of us want to have. Unlike any other bill or debt payments where we get immediate value in the form of a product or service, insurance payments are obligations that you "ideally" would receive nothing in return for your hard-earned cash... other than peace of mind. To use insurance requires you to lose something, and some things (such as your life) are too valuable to lose. But the reality is, we can't predict the future-- even seconds ahead, so we buy insurance to indemnify us or our families in the event of a financial loss.

That last sentence is what I want us to focus on today. When most people think of life insurance, they think of burial expenses and a few debt obligations left behind by their loved ones. A few think of insurance as a way to safely save for college or retirement (very bad idea). I think the first problem is the fact that it's called "life insurance" instead of what it really is... income protection.

Income protection is the basic purpose of life insurance. If you earn income and have ANYONE that requires your financial support, you need income protection, because when you're gone, who's going to keep paying your loved ones your income? Unfortunately, many of you have learned this the hard way-- after experiencing a financial tragedy due to the death of a supporting family member. Sadly, because of lack of knowledge, people today are still buying life insurance without consideration of their actual financial needs.

So how do you determine how much and what kind of insurance is needed? There's a simple formula called the D.I.M.E. that can help you calculate your approximate need. The acronym D.I.M.E. stands for "Debt & Death; Income; Mortgage; Education--" these are the four basic factors you should consider when purchasing life insurance.

Typically, I find that most families need about $500,000 of insurance coverage on each bread-winner in the home. Unfortunately, the average person only has between $25,000-$50,000 of coverage--that's a tragedy waiting to happen.