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Protecting Your Life with Life Insurance

We often get the question of "how much life insurance do you think we need?"  In our opinion, the word "need" should be eliminated from all financial planning conversations.

Nobody needs money for retirement.  We could all live off of social security checks and our kids for a while.  They lived off of us for long enough, so it's time for them to pay us back!   We don't need a nice home.  There are plenty of places that we could make as our residence with a roof over our heads and running water. 

Instead, we want money to spend and enjoy in retirement.  We want a nice house for our family to live in because we worked hard for it.  We want to protect the important people in our life in the event we die prematurely.  They can have the money for their future retirement, and may be able to stay in that nice home, and go off to school to be a doctor some day, too. 

If you want coverage, here are the two primary considerations:  how much & what type

How much you can get depends upon your age and income.  For example, a physician who is 30 years old, making $250,000, is eligible for much more than a 50 year old earning the same.  Why?  The time remaining to earn those dollars is longer, so the economic value you possess is greater.  Insurance companies break it down like this:

  • If you're in your 20's, multiply your income times 30
  • In your 30's, it's income times 20
  • 40's, take it times 15
  • 50's x 10
  • 60+ equals 1x net worth. 

So somewhere between $0 and the number you calculated above would be where you land.  And before you ask-no, you would not be "over-insured."  Insurance companies will never, ever allow someone to over-insure themselves or their possessions.  Someone can't total their 2008 Honda Accord and replace it with a 2015 Audi A8!  It doesn't work that way for cars, homes, disability insurance, or life insurance. 

The type of insurance is all about your situation, particularly with cash flow.  If the benefit is important to you and cash flow is tight, you'll likely start with temporary coverage (term insurance).  This will provide you huge benefits in relation to the cost, if something bad happens.  Remember that this coverage is temporary, so you may want to be sure to get coverage that you have the option to convert to permanent coverage later.  The reason we say this is because when your cash flow situation changes.  Permanent life insurance can be used as an additional savings strategy.  Due to its favorable tax treatment, many high income earners want it as part of their overall financial plan.  Maybe you will as well...

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