Life insurance is a foundational part of your family’s financial security. Should you or your spouse pass away, the income of your household could drop and cause a hardship on the surviving spouse and children. That’s why life insurance is a must, but with so many different options out there, how do you know which policies are right for you and how to manage them? Let’s take a look at the options.
Term Life Insurance Wins
Whole life insurance policies are obscenely expensive, and too many insurance agents recommend these policies because of the high commissions they’ll earn on the sale. Insurance shouldn’t be considered an investment, and that’s how these policies are often sold.
On the other hand, level-premium term life insurance policies cost much less and allow you to invest your savings – if that’s the best choice for your savings – instead of having the insurance company do it for you.
Term life insurance wins.
How to Choose Coverage Amounts
Unfortunately, some people choose how much coverage they need based on the wrong factors.
For example, a family might choose a term life insurance policy that would cover their debts should a family member pass away. While it might be a blessing for a surviving spouse to be able to pay off the credit cards and mortgage using life insurance, it might not go far enough. What happens when the children need to go to college? How about just living life and retiring well? These factors need to be considered when choosing a coverage amount.
Instead, I recommend looking at the question of income replacement. In other words, how much money will your family need so that they can invest and earn enough to replace your income should you pass away?
A couple who are both age 35 and planning on retiring at age 65 should take out a 30-year term policy. A good rule of thumb for the amount of coverage you’ll need is $1,000,000 of coverage for every $40,000 of income each individual makes. Should an individual need to replace $100,000 of income, then, they would need $2,500,000 of coverage.
How to Stack Term Life Insurance Policies
By stacking term life insurance policies, there’s money to be saved. Here’s how this works . . . .
For a preferred male, age 35, for $2,500,000 of coverage with a 30-year-level term policy, he would pay a monthly premium of $223.56. Alternatively, he could stack the policies for added savings. He might choose to stack the following policies:
- $500,000, 10-year-level term policy for $21.88 per month
- $500,000, 15-year-level term policy for $26.69 per month
- $500,000, 20-year-level term policy for $32.38 per month
- $500,000, 25-year-level term policy for $43.75 per month
- $500,000, 30-year-level term policy for $48.56 per month
Notice that this still equals $2,500,000 of coverage at the start, with policies dropping off over time. However, one important difference is that you’d be saving money from the start as well . . . the total of the policies is $173.26 per month for a savings of $50.30 per month.
If this person is in the Accumulating Wealth Phase, and they invested the money they saved at an 8% return, at the end of 10 years they would have an extra $9,120.65. At this point, the first policy would drop off, and he would have an additional savings of $21.88. Continuing this process of investing savings, at the end of the 30 years, his total balance of savings and investment growth would be $102,009.78.
By stacking term life insurance policies you’ll save money and have the option to invest that money – who needs whole life insurance to do that? Feel free to mix your policies however you see fit, but always make sure you have enough coverage.
Remember: The purpose of life insurance is to replace your income should you pass away so that your family can continue paying the bills. It’s a great way to leave a legacy of caring for your family.
If you need some help figuring out which term life insurance policies are right for you, contact a Certified Financial Planner™ who can point you in the right direction.
Do you need life insurance? What questions do you have? Leave a comment!