Life Insurance – Part 3 – How much life insurance do you need? (Part 1)

• Posted by: IRON100, March 4th, 2010 at 1:01 am
• Comments: 0

I have already decided to break Part 3 into two parts (meaning Part 4 and beyond is possible). I am going to rant. Once I get to 100o words, I will cut this discussion off and rant again in the next post.

Again, what I may say here might anger some in the insurance industry, but since this is a blog for the StockTwits community, I will say what I have to say and then I would hope to get some feedback and commentary. I would also even invite a contributor who might want to take another side on this issue. I am, as one can read from the previous posts, a big believer in term life insurance over permanent or whole life insurance. The reasons is quite simple. One can save money by providing for the basic family needs with term life insurance, and one can invest the difference. I am absolute living proof of that axiom, because I did invest the difference and learned how to invest the difference. I believe that ANYONE can do it. It is not just the finance majors and "quants" out there who can invest smartly, and one does not necessarily have to be a buy and hold investor to do it either. For most people, the purchase of whole life insurance is simply not an optimal use of their hard earned money.

It looks like I am taking the easy way out by referencing a Smart Money calculator for life insurance requirements. Well, I guess you are right, but I picked it because it deals with one aspect of the topic that many do not cover. That subject is death benefits for minors under Social Security. If one is going to figure out the cost of raising kids and building a college fund, it should at least be figured in to save moneyr perhaps figure out what marginal amount of additional insurance is needed to get a child through college. I will speak to that topic later in this post.

This calculator makes it look so simple to figure out the exact need for life insurance. Well, if you have been married long enough (I know, I'm single, but I have helped a bunch of married folk over the years figure out investment questions), you know that all situations are different and many are downright contentious.  Here are just a few of the topics:

1) Final expenses: I may actually deal with this topic as a separate blog post, but as a person who has buried three people in my family (no, they died of natural causes, I don't want suspicions aroused), people allow panic and emotion to get in the way of sound decisions. Burial, even SIMPLE BURIALS AND CREMATIONS, are NOT CHEAP. Some states now mandate certain charges associated with cremation, and the funeral industry continues to prop prices beyond belief. If one does anything, regardless of how sensitive the issue is, one must discuss and finalize burial plans. Why? Because people die, and they die when one does not expect them to do so. When one does not plan for such things in advance, the whole matter of grief makes people spend like maniacs (I decided to leave any references to drunken sailors to Congress, since they fund war operations). Funeral pre-payment plans are not always the cheapest either, so I think covering these expenses in life insurance costs is a good idea.

2) College education expenses: This can also be a controversial topic, as the cost of college skyrockets from year to year. You can check the Smart Money calculator above, but what you need to do in this case is:

A) Do an estimate of any college savings (529 plans, Coverdell plans, etc) and figure out how much one will need to cover that cost over those years you may not be around until each child reaches 18. If you can find a hourly fee based financial planner that is not selling retail brokerage products, one can get decent advice without an agenda on this issue. One does not need a sales presentation here, one needs a good solid estimate of what is required. There is a note in that calculator regarding what is cost for the 2008-2009 school year. Let me clue you on something. With state budget deficits skyrocketing to the moon, one could see some increases in tuition will into double-digit percentages. Take no thumbnail estimate for granted. The net deficit between these plans and your requirements for college need to be added into one's life insurance need estimate.

B) Estate settlement costs: This will eat up the last of first 1000 words. Needless to say, one must deal with estate issues BEFORE one dies. It may end up being a knockdown-drag-out discussion, but these items have to be covered before the time of death. I have witnessed families losing fortunes in lawsuits and in settling disputed claims when I was in the financial services industry. The costs of dealing with these issues are far cheaper and easier when done before death, and that does not just include a will. There are business agreements, survivorship agreements, partnerships and family corporate entities that must be subdivided or be set for succession planning. Life insurance does have its place in these kinds of estate settlements, but those settlements must be planned for and pretty much set in stone before the death of the individual involved in them. To do otherwise could lead to financial suicide. Trust me, I have seen it happen.

Let's stop here for now and talk about government benefits in the next post. In either the next segment or (if it gets wordy, the one after that), to pull all the columns together. At some point, I will cover the items regarding key person insurance for business people, but I want to keep it simple here. I know many people will be in that position one day, but I want people to be in the position to do that after they cover their family nest egg first.