September 01, 2022
Life & Finance - #4 Term Life Insurance
Switching gears here today to talk about a heavily contested, yet imperative (in my opinion), piece of any person’s overall financial plan – term life insurance. We hear it said all the time, “…well I’ve got coverage at work.” 99% of the time, that coverage (especially if it is just the basic amount) is nowhere near enough. Term insurance, especially for a younger person, serves the purpose of replacing income (or human capital) – and is especially important for someone with a spouse, or a family that has become reliant on a certain lifestyle or level of family income.
Let’s consider an overly simplified example; let’s assume you earn $60,000/year. Out of that amount, you must pay your payroll deductions. Then there is a portion of your income that goes toward expenses that are incurred because you are alive. Estimating the total of these amounts to be $25,000, this leaves $35,000 of your annual salary as the amount of money your family relies upon for living expenses over a one-year period. Let’s consider what happens if you pass away. All of a sudden, gone is the $35,000 you were earning for the family. Further, let’s assume you were going to work another 30 years past the time of your unforeseen death, and that throughout that time your salary would have been keeping pace with the cost of living (2% assumed). Using today’s terms for calculating purposes, the value of that $35,000/year amount which your living/working self would have provided to pay for your family’s living expenses, works out to be $615,000. Considering an individual who makes more or less income, the calculation is identical; it just results in a larger or smaller amount of coverage necessary. The calculated living wage ($35,000 in this example) does not take into account potential raises you may have received over the years. It doesn’t reflect added financial demands such as changes in your partner’s work status, including the possible inability to work in the weeks and months following your passing, contributions towards your children’s education, potential increases in childcare costs, and so on.
The purpose of term life insurance is not so that your family will profit if you pass away. It is intended to ensure that your family receives the value of your future earnings, in order that it may maintain its lifestyle. Term life insurance is inexpensive, relative to the amount of coverage it provides. It will protect your family, financially, during a very vulnerable time. There is a small chance that your family will be thrust into a situation in which it will receive a payout from your policy. Certainly, for a family that comes to find itself in the devastating position of grieving the death of a primary financial contributor, its financial future will be predictable and healthy.
“You don’t buy life insurance because you are going to die, but because those you love are going to live.”