All right, so I’m in a lot of different groups. And in one of the groups I’m in, a new nurse practitioner asked a life insurance question.
Specifically, they were starting a new job and didn’t know whether or not they should get life insurance.
Most People Don’t Understand What Life Insurance Is
Many people chimed in, many stating that they didn’t know, and some even giving advice that honestly made me cringe a little bit.
My takeaway from that particular thread was that many people do NOT understand at a basic level what life insurance is.
And for those that do, they don’t have a good grasp on the thought process of coming up with a number for how much life insurance you should take out.
So, in this article, I want to address some of those points. Specifically, I want to focus on
- “What is life insurance?”
- What to consider when deciding whether or not you should get life insurance
- If you’re going to get life insurance, what to consider when deciding how much you should get
Important Points of Consideration
Two house cleaning things. The first is that there’s no specific financial advice being given.
Everybody has specific, unique circumstances that may require some very precise tailoring, so seek the guidance of a professional who can dig deep into your personal situation.
Secondly, if any question comes up, I’m probably gonna end up making a part two on this.
So, make sure you put your questions in the common sections below.
So let’s go ahead and get started.
Example Scenarios
The first thing I’m going to do is that I’m going to give you two scenarios right up front.
You can think about those scenarios.
I’ll do a quick explanation of life insurance and the general thought process behind life insurance and general recommendations.
Then I’ll wrap back around at the end to give you my thoughts on those two scenarios.
SCENARIO #1: MARRIED WITH A KID
Here’s the first scenario.
John is a CRNA who makes $200,000 a year, and he’s married to Sarah, who is a stay-at-home mom. They both have a baby girl whose name is Emily.
So the question we’re going to answer at the end of this is:
- Should they get life insurance?
- Who should get life insurance?
- If someone is going to get life insurance, how much?
SCENARIO #2: SINGLE AND READY TO MINGLE
The other scenario involves Lizzie, who is a registered nurse in her early twenties. She makes $80,000 a year and has no kids and she’s single. Same question as before:
- Should she get life insurance?
- If she is going to get life insurance, how much should she get?
So those are the scenarios. Just be thinking about those, and I’ll talk about them at the end.
What is Life Insurance?
Let’s take a step back and talk about what exactly life insurance is because, like I said earlier, I think too many people have a wrong thought about what insurance actually is.
In a nutshell, life insurance is a product offered by insurance companies that provides a payout or a death benefit.
In exchange for you paying premiums, the insurance company agrees to pay out a lump sum amount to your beneficiaries in case of your untimely …well…demise, provided that the policy is in good standing.
If that wasn’t clear enough let me phrase it another way.
You buy life insurance and pay your premium payments.
If you die while your insurance is still active the life insurance company will pay a lump sum to people you designate.
THE PRIMARY OBJECTIVE OF LIFE INSURANCE?
The primary objective of life insurance is to provide financial security to your loved ones in the event of your unexpected death.
I understand that death is a difficult topic, and it can be hard for us to talk about it, even though we encourage our patients to prepare for their own mortality.
However, it’s a fact of life that nobody likes to contemplate. Regardless of our desire to avoid it, everyone will eventually pass away.
Life insurance can help to replace your income when you die, ensuring that your spouse, family members, or anyone you choose will be taken care of beyond the grave.
THE DIFFERENT TYPES OF LIFE INSURANCE
Now, let’s take a closer look at the different types of life insurance available.
There are various subtypes, but we’ll focus on two main categories: term life insurance and permanent or cash-value life insurance.
About Term Life Insurance
Term life insurance is different from permanent life insurance because it provides coverage for a specific term or time period, such as 10 or 20 years.
During that time, you’ll pay a set premium every month, and if you pass away within the term, the insurance will pay out a death benefit to your chosen beneficiary.
After the term ends, the insurance goes away.
About Cash Value Insurance
On the other hand, permanent life insurance, also known as cash-value life insurance, works differently.
It’s simply an insurance policy that lasts your entire life. It includes a savings component that builds cash value over time, so you can borrow money against the policy.
In other words, it’s more than just insurance.
I Prefer Term Life Insurance
For the purpose of this conversation, I’ll stick to term insurance since that’s what I prefer and what I think makes sense for most people.
It’s substantially cheaper and it’s easier to understand.
For instance, if you buy a $500,000 20-year life insurance policy and you were quoted an annual rate of $221, as long as you make your payments for 20 years, the policy will be valid.
If you die within that 20-year period, your beneficiary will receive a payout of $500,000. That’s all there is to it – simple and straightforward.
What Determines the Cost of Life Insurance?
Now the other question that you might be wondering is what determines your life insurance cost, right?
After all it’s no secret that different people pay different rates. Some of the things that will affect your premium rates include things such as age, health, and lifestyle.
If the pattern isn’t very obvious, I’ll go ahead and tell you. The things I listed in one way or the other are based on the likelihood that you’re going to die.
You see insurance companies use complex calculations to determine the likelihood of a policyholder passing away within their specific term.
For example, if you buy a 20-year term insurance the insurance company is trying to figure out what is the likelihood they’re going to have to pay out a claim. In other words, what is the likelihood you’re going to die within that 20-year term?
EXAMPLES OF WHAT YOU COULD PAY FOR LIFE INSURANCE
To give you a rough idea, you can refer to various tables available online.
For this example, I’m going to be using the table NerdWallet created. I’ll link to their article below.
Let’s take a look at the cost for a 30-year-old and a 40-year-old.
Keep in mind that as you age, the cost of life insurance increases, due to the higher likelihood of death while the policy is still active.
The following numbers are based on a $500,000 policy for a 20-year term life insurance and for whole life insurance.
For a 30-year-old man who’s in good health and is a non-smoker, the average annual cost for term life insurance is $221, while for a woman, it is $187.
The average cost for whole life insurance, on the other hand, is $4,188 per year for a man and $3,722 per year for a woman.
Please note that these numbers are just averages and will absolutely vary based on factors such as your health, location, and lifestyle.
As an example, in that same article, you’ll see that if that individual was a smoker, their term rates would about triple.
How Do You Determine If You Need Life Insurance?
I don’t want to dwell too much on cost the main point was to give you an idea of how much you might expect to pay along with highlighting differences in the cost of term vs whole life insurance.
Let’s circle back to the fundamental question: how do you know if you need life insurance? I know many of you are probably wondering about this.
For the absolute best advice based on your personal situation, seek out a financial advisor or insurance broker who can give you advice tailored specifically to your personal situation.
You can find one through the links in the description below.
WHEN YOU MIGHT NEED LIFE INSURANCE
Personally, the way I see it, the key question is whether you have any dependents.
As I mentioned earlier, by dependents, I mean someone who relies on your income.
Or, more specifically, someone who depends on the value you bring to a situation such that if you were no longer around, they would have to hire someone else to replace you?
The latter is an important distinction that’s often missed that I’ll address a little later.
Consider, for example, if you have minor children under 18, or adult children with special needs who still rely on you.
You might also have a spouse or significant other with whom you share expenses. If you have a mortgage or rent, could they make the payments if you were no longer around?
These are some of the situations where you really need to start considering life insurance as a potential safety net.
WHEN YOU MIGHT NOT NEED LIFE INSURANCE
Now, let’s discuss when you might not need life insurance. While some people overlook its value, others go overboard with coverage.
For me, if no one depended on my income, I probably wouldn’t get life insurance. If something were to happen to me, no one would be financially harmed by my absence.
For instance, if you’re older with grown, self-sufficient children, and/or if you and your spouse have significant savings and no mortgage, life insurance might not be as valuable.
It’s essential to think critically about this because emotions can cloud the practical and logical aspects of the decision.
According to a Penn State University study, 99 percent of term insurance policies never pay out a claim.
This isn’t necessarily an issue with term insurance itself but rather with the nature of insurance. From what I have seen and read in general, unless you’re very unlucky, you’re likely to lose money on insurance.
I’ll discuss this more in a separate video dedicated to insurance, but it’s important to remember that insurance companies are not eager to pay out, and they are in the business of making money.
If they’re insuring you, there’s a good chance you’ll outlive the policy term. Some may see this as negative, but I view it as just the cost of doing business, if you will. I’m willing to pay the insurance company to pass on that risk to them.
If you’re interested in getting an insurance quote, check out nursemoneytalk.com/insurance. The link is also in the description below.
How Much Life Insurance Should I Get?
If you’ve decided you need life insurance, the next question is how much to get. The general guideline, depending on who you talk to, is to get about 10 to 12 times your annual income.
You’ll need to do some research to see if you should consider getting more than 12.
As for going below 10, I personally wouldn’t go below 10 times my income, but there could be situations where a higher amount is justified.
Revisiting the Scenarios
Let’s revisit the earlier examples I gave.
SCENARIO #1
The first scenario was John, a CRNA making $200,000 a year, married to Sarah, a stay-at-home mom with a baby girl named Emily.
Should they get life insurance? Let’s start with John. Should he get life insurance?
Well, John works, makes an income, has a young family with a stay at home wife and a kid who clearly depends on his income, so he should get life insurance.
How much life insurance should John get?
Using the 10 times annual income rule, he’d need at least $2 million in coverage.
Now, should Sarah have life insurance?
Many overlook the value a stay-at-home partner brings. And to be clear by value, I’m specifically talking about the monetary component of it.
Although Sarah isn’t earning an income, she provides significant monetary value that would be costly to replace.
In this particular scenario, let’s make it easy and say that she only just watches their kid and didn’t do anything else. In real life, we know that’s not the case, but for the sake of simplicity, let’s say that was the case.
God forbid something was to happen to Sarah, John would now have to find daycare for Emily.
If you don’t have kids, or you do have kids and have been fortunate not to have to deal with daycare, let me go ahead and tell you daycare is crazy expensive.
Based on that one aspect, you can start to see where I’m going with this scenario, and also what I meant earlier when I said you might want to consider life insurance if someone depends on the value you bring, and if you weren’t around, they would have to pay money to acquire that same value.
In this example, it would be daycare, but in real life, we know a stay-at-home partner brings other monetary value.
Depending on what article you source and how you break down that calculation, some estimate the financial impact of a stay-at-home spouse at around $40,000 to $50,000 per year, which could be more depending on the number of children, where you live, and other factors.
For Sarah, based on our example and using a $50,000 annual replacement cost, a policy of around $500,000 might be appropriate.
As for their baby, Emily, I wouldn’t personally get life insurance for a child, although some parents choose a small policy to cover funeral expenses.
In the U.S., the likelihood of a child passing away is extremely low, so typically term policies are pretty cheap. You could get it if you wanted, but it’s not really something I would consider.
SCENARIO #2
Regarding the second scenario, Lizzie, a single, twenty-something nurse with no kids, I would say she doesn’t need life insurance, and here’s why.
No one depends on her income, so it doesn’t really make sense to get a policy.
However, financial decisions like these benefit from consulting with a financial advisor to discuss your specific circumstances.
Therefore, consult with a personal financial advisor to discuss your particular situation.
You can explore life insurance options and talk to a financial advisor by following the links on the screen and in the description below.
