Most term policies don’t pay a claim making them quite profitable. Many large, well respected insurers (no name calling here) even bank on a certain percentage of their term policies either lapsing due to non-payment or due to non-renewal and expiration of the term, and they are consistently correct.

As for being financially reckless, the only financially reckless people I know invest in risky mutual funds hoping for a “get rich quick” scenario – investments that they don’t fully understand made up of companies that they have not fully researched being run by a professional who does not have a stake in the investments (and thus no built in incentive) in the fund.

Some of the most successful people I personally know own a lot of cash value insurance. It’s conservative (like them). And the general portfolio gives a great deal of insight as to what the 100+ year old insurance company invests in to stay alive during good times and bad. These people are just following suit, not trying to re-invent the wheel with the next “hot” investment product.

Of course, these folks also invest in real estate, but that’s another blog entry methinx.

Far too complex for me to understand, and probably outside the scope of this blog as well.

Thank you for the help.

How much you want to hedge is up to you. If you are reading this post, then you are already putting a lot of thought into this. Go with your gut feeling.. because all we are talking about is a hedged bet.

p.s. I’m only talking about term life here, whole life is a waste of money for the reasons described above.

Sadly,I speak from experience regarding life insurance.

My wonderful hubby died this past year at the age of 42. We carried 8 times his salary.
I cannot emphasize how much the money involed took away the stress of dealing with paying for his funeral and any possible financial problems/paying bills, etc.
It allowed us a cushion of TIME-something much more valuable than $$$$-to grieve and mourn.
We will be sad for a long, long time, but having that insurance money made the difference between picking up the pieces and making a new normal for us OR having to deal with moving to a different place( like from house to apt)or any other myriad of problems that could have risen when the other half of the family income suddenly stops.
Buy the term insurance. You really have NO control over your life expectancy, no matter what the experts say. It’s more than just a way to pay for the funeral. It’s peace of mind for those left behind.

I also have a problem with the amount of insurance suggested. The idea is to pay off debt, and allow for replacement of income. If you have no debt (e.g. the house is paid off), then the income required should be less.

In Trent’s example, 1.6 Million should provide, at 4% (actually earning 7% and reinvesting 3% to keep up with inflation), a continual income of 64,000 dollars a year, which is 28% more than the example salary of 50K! Do you really want to make yourself worth more dead than alive? With two kids adding to $1000 dollars a month in SS you’re talking $76,000 dollars, a 51% instant raise for knocking you off :-)!

Given that over 30% of the examples current income (SS and Medicare (7.4%), 15% towards retirement, assuming 15% towards mortgage payment, and a couple of percentage points towards other debt) you are trying to replace is no longer necessary, you should only need something like 70% or less of the original salary to ensure “income replacement”. Again using the “don’t touch the principle” method of 4%, you’d need $35,000 per year for real income replacement, amounting to $875,000 of insurance, plus what it took to pay off the debt, say $225,000, leaving you with $1.1 Million, or half a million less in necessary issurance (about a 30% reduction).

If you chose to factor in SS benefits to the children, in my example (possibly a bad one, you’d need to check your statement for a real number) of $12K a year, then the number drops further to $800,000, or half of the original estimate!

Finally, if you are willing to touch the principle over this time, even taking some reasonable public college into account, you can drive that number lower, and still feel comfortable that you are leaving your family covered. And this is before you eliminate all your debt and have significantly built your net worth.

All of this excludes other family members (parents, grandparents, etc.) and the support and help they may be able and willing to provide. My point is to use life insurance as a tool for helping your family in the event of your death. Not to provide them the equivalent of winning the lottery.

Quite possibly, the smartest advice I ever received was, “Don’t put all of your money in one basket.” Whereas many on this forum pursue the, “buy term and invest the difference” philosophy, or the, “buy variable life and invest within” philosophy, neither may make the best use of available solutions. The right solution is the one you develop, or better yet, the solution you develop with the guidance of a life insurance professional who helps you like a teacher. This teacher will best equip you to make your own decision. My decision, and commonly the decision I recommend to my clients, is that we don’t know the future, we don’t know whether our need for life insurance will increase or decrease, and we don’t know what the most (tax) efficient road to meet our financial needs will be. So let’s set ourselves up now, to be able to choose from a broad array of options in the future.

2 cents.

I have a client paying over $10,000/year for a $500,000 whole life policy (continuity of business coverage)

The policy has been in effect for almost 25 years (at this point, given their health, they’re stuck with it)

The dividend reduces the annual payment by about 15%, but comes nowhere near paying for the policy.

>reach a point where the insurance literally is paying for itself.