A Gift Of Love

If I were forced to make a list of the different financial products that people generally hate to buy, life insurance would most likely top the list. Because when you purchase life insurance, you’re admitting your mortality. And while admitting your mortality is arguably a healthy thing to do, it certainly isn’t a fun thing to do.

Life insurance can be challenging for consumers because it deals with two polar opposite concepts: practicality and love. Let’s start with the prickly part first, and then we’ll tackle the fuzzy stuff.
Practically speaking, when you die, your income dies, too. In fact, if I were forced to disclose the worst aspect of dying, from a financial perspective, I would point to the death of a person’s income.

For most people, life insurance should be used to replace the disappearing income. Your lifestyle, your expenses and your goals are all based on your income. If you die, your income dies, and your survivors’ lifestyles, expenses and goals die. A death isn’t a blip on the screen that results in quick financial adjustments by the survivors. A death, when not supported by the proper amount of life insurance, rips people from their homes, routines and dreams.

Still with me? Good. A very important question needs to be answered. How much life insurance should a person have? Well, a lot more than you think, and a lot more than you want to buy. Despite the innate laziness of “rules of thumb,” they are often reasonable and appropriate. In the life insurance world, the rule of thumb is to have 10 times your income in life insurance coverage. For instance, if you make $50,000 per year, then you should have approximately $500,000 in life insurance.

This amount of life insurance would allow your survivors to re-create a vast majority of your net income, for quite some time, until they find a new normal. Without a doubt, the most important aspect of life insurance is having the right face amount. Unfortunately and fortunately, I’ve been there to pick up the financial pieces, several times, after the death of someone. Sadly, hundreds of thousands of dollars don’t help much if the situation calls for hundreds of thousands of dollars more.

It’s worth noting that there’s an old-school approach that primarily relies on life insurance to pay off debts (usually the mortgage). But I’ve found that this strategy is shortsighted and outdated. While the elimination of a person’s largest monthly obligation, via a life insurance death benefit, is prudent, it can still create major short- and long-term cash flow issues. I like to think of it this way: If you kill the egg-laying chickens, then you will run out of eggs. In other words, if you use a bunch of money that could otherwise be used to create an income, then you lose the ability to create money forever.

Now for love. I told you that life insurance is also about love — although it’s a sad day when you start taking love advice from a financial columnist. Life insurance is love personified. A person who buys the proper amount of life insurance is securing the future of his/her survivors.

I once heard love described as staring at two peaches and taking time to figure out which peach is the best, because that’s the one you plan on giving to your significant other. That’s life insurance. You are taking the time and money to provide the best possible outcome for your loved ones, even though you won’t be there to enjoy it with them. The opposite of love is leaving their future to chance with an uninspired “good luck with that.”

Take some time to walk yourself through the financial lives of your loved ones, in the event of your passing. And if that doesn’t inspire you to act and buy the proper amount of life insurance, at least buy them a few egg-laying chickens.