So you are thinking about life insurance. Awesome work! Life insurance is an essential tool for building generational wealth for your family. Many families often find out they are either under insured in the case of an untimely death or injury or they are over insured, wasting money that could be invested in vehicles with a better return.
Below are some of the keys to nailing life insurance for your family
You are Generally Better off Sticking to Term Life Insurance
Life insurance as an investment vehicle is generally not the best option for the vast majority of people. The fees associated with whole life plans wipe out most of the returns. In the vast majority of cases whole life insurance will underperform real estate, bonds, and stocks (where your money should be if you are younger!)
Term life insurance is very affordable and is great for mitigating the financial risk associated with an untimely death. Often we think of life insurance as being used to pay off bills or pay for the funeral. We should also look at life insurance as a way to offset lost income. If the main breadwinner is making $100,000 out of $150,000 coming into the household the funeral is only the start of the family’s financial concerns. Term life insurance ensures the household can obtain up to several years of the breadwinner’s income up front. This provides time to adjust to lifestyle changes and ensures stability for the family if there are children. It can also be an injection of wealth if the proceeds go to adult descendants.
Do Not Forget About Disability Insurance
Not dying in an accident is awesome! However the lost income associated with an accident induced disability can impose a greater financial hardship than if the person had passed. Disability insurance essentially ensures the continuation of some portion of your income if you are incapacitated to the point you can’t work. It’s fairly affordable and certainly worth having.
Both Partners Need to Need Life Insurance if You Have Kids, Even if One Isn’t Working
It should be obvious but homemakers are contributing economic value to the home. In a scenario where one partner is making $100k and the other partner is staying home with three children the sudden passing of the homemaker can be economically (and obviously emotionally) catastrophic. Preparing meals, laundry, supplemental education, daycare, and managing the affairs of the home have meaningful economic value. The Washington Post puts the market value of a homemaker’s labor just under $100,000. Its critical that the homemaker is also ensured so the homemaker’s contributions can continue after their passing.
A Whole Life Plan isn’t the Ideal First, Second, or Third Investment for your KidsBottom line your babies more likely than not do not need life insurance. Its pretty unlikely they will pass as a minor and the funds would be better used for things like increasing your family’s emergency fund, college savings plans or starting a small nest egg to kick start the child’s savings.