How Much Insurance to Buy

You probably aren’t ever going to be much healthier than you are today. So if you need insurance to protect your family, don't wait.    
This reality hit me hard recently, when my doctor told me that I have basal skin cancer. It turns out that this cancer is very treatable and common. But it is cancer, and scary. And if I am no longer around as breadwinner, my family is in jeopardy. My wife and I have two youngsters and one on the way this summer.
When my doctor told me, I immediately blurted out in a relieved tone: "Well, that was close."  
My doctor wasn't used to getting this reaction. So I explained that early last year I had bought another $1.5 million in low-cost term life insurance to protect my wife and kids. This was to supplement the $1 million I had from when we first got married. Plus, I picked up long-term care insurance recently, too.  
With this diagnosis, getting any new insurance for a while may be out of the question. That’s why I am glad I got the coverage before my medical condition could complicate matters.
The older we become, the better the odds of getting a diagnosis like I did. And also high blood pressure, high cholesterol and more weight. All these factors and more can make obtaining coverage difficult, expensive or impossible.
Popping the hood on my own insurance situation might help you better deal with yours.
First off, life insurance can come in a dizzying variety, and often is sold aggressively by commissioned salespeople. This isn’t inherently bad:  The sales reps need the incentive to overcome the inertia of people who really do need to be covered. A small percentage of these insurance buyers no doubt will die soon, and their families will be left with an extraordinary gift.
But life insurance and investments aren’t like peanut butter and chocolate. They aren’t always better when mixed together.   
Some life insurance and annuity products (a form of insurance) offer both insurance and savings features. The reality is that, unless there is a specific need for the combination, you are usually better off with simple low-cost term insurance.
Salespeople will sometimes argue the merits of the combination products as a “forced savings” plan. Yet if you are thoughtful about your future financial needs, you probably don’t need to be handcuffed to follow a long-term investment plan.
I ran an analysis of how much money my family would need if I were to die tomorrow. This includes our mortgage and investment property debt, likely future college costs, current living expenses and my wife Allison’s needs in retirement. 
Here is my coverage:
$50,000 of free life insurance from work.
If you are working, you may have life insurance as part of your benefit package. This is great, and you can often buy more -- typically in multiples of your compensation toward the end of each year. You will want to find out what is cheaper, a separately purchased policy or one through work.
Realize that this coverage will get more expensive over time, and if you leave your job it won’t be coming with you. There is a danger of becoming uninsurable and not being able to buy it on your own later. Finally, a mere 50 grand is not enough to fully protect your family. So you will probably need to buy more anyway.
$1 million of 20-year return of premium term insurance.
When we got married, we wanted to have kids, so obviously we needed life insurance.  Behaviorally it’s hard for me to spend money, plus I was confident I would likely stay alive for the following 20 years. At that point, the children likely would be almost out of the house. And I figured I then would have a sufficiently large investment portfolio to provide for my wife in her old age without me.
My solution was to buy a policy with a rider that ensures that I will get all my premiums returned to me in 20 years. For this, I had to pay extra in premiums. The insurance company returns my payments by making money from the premiums. While there is no official rate of return, I did the math and discovered it was about 3.5% annually.
Not sexy, but we should get $40,000 when my son will start college.
$1.5 million of 20-year term insurance.
Early last year, my second child was born and we knew we wanted a third. I did some nerd math and determined we needed another $1.5 million in coverage. This will cover my family’s needs for the next 20 years.
If I live for the whole period, I technically lose and the insurance company wins. This is like home insurance when nothing catastrophic happens, but it is okay with me. I have the peace of mind. The policy purchases I made earlier would be, of course, more expensive for me today because I am older.
One final thought: Please make sure that when things change your beneficiaries are updated on these policies. I just witnessed a situation where the money was left to the wrong person when the policyholder died. Thankfully, the beneficiary was nice enough to sign away rights to the award to the deceased’s intended recipient. But this too often is not the case.
Tom Gartner, CFP, is a financial advisor with ISC Financial Advisors in Minneapolis.
This article represents opinions of the author and not those of his firm and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.
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