Dear Rick:
I have a life insurance issue that I hope you can help me with. I am in my mid 40s and have just gotten divorced. As part of the divorce settlement my ex-wife got my life insurance policy. Therefore, at this point in time I have no life insurance. My insurance agent has been hounding me to buy a policy. I question whether I need a policy or not, but my agent says since everyone is going to die, everyone needs life insurance. My first question to you is do you agree with that? If you think I should get life insurance, how much do you think I need? My agent tells me at a minimum I need eight times by earnings. I make about $125,000 and a million dollar insurance seems way out of line. Any thoughts?
Joel

Dear Joel:
I don’t agree with your life insurance agent that everyone needs life insurance. That sounds like salesman talk to me. I believe life insurance is like every type of insurance and that is it is meant to cover a risk. With life insurance the risk isn’t if you are going to die or not because we know that’s going to happen to everyone. Rather, the risk involved is when you pass, is there going to be someone who loses out financially that you need to protect. Since you are single with no dependents and no one is financially dependent upon you, the answer is clearly no; therefore, you don’t need life insurance because no one is financially dependent on you.

I hear so often that insurance people try to oversell life insurance. Life insurance can be a valuable financial tool if it’s used correctly. If life insurance is not used correctly, it is merely a waste of money.

I also hear from many people that life insurance agents will tell them that life insurance is a good investment. As far as I’m concerned, nothing can be further from the truth. After all, for a life insurance policy to pay in full you have to die. I never think having to die to get a return on your money is a good investment. Life insurance can sometimes be a great way to provide financial security for those dependent upon you; however, it is not an investment.

When it comes to formulas to determine how much life insurance you need, once again, I’m not in favor of those. My belief is that you need to look at your individual situation to really determine your life insurance needs. When you use a formula based upon income, it ignores things such as assets that you have accumulated, pensions and what your needs are. Therefore, these formulas that are meant to be for everyone, as far as I’m concerned, are not worth the paper they’re written on.

For those people who need life insurance, I always encourage them to look at term insurance. Term insurance is by far the most cost effective type of insurance and it is much simpler to understand. Typically, with a term life insurance policy your premiums are fixed for the term of the policy. One of the beauties of term insurance is that you’re only buying insurance for the time period you need. In most situations people don’t need life insurance their entire life; they may need it for a 10, 20 or 30-year period. With term insurance you get to select the time period that best suits you. In addition, one of the other benefits of term insurance is that it’s much easier to shop around and get competitive bids.

As far as I’m concerned, if someone tells you that everyone needs life insurance it’s nothing more than a sales tactic to get you to buy life insurance. That’s why there’s an old adage in the insurance industry – insurance isn’t bought, it’s sold. Therefore, before you buy life insurance and even if you have an existing policy, before you pay your next premium, make sure you actually have a need for life insurance.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com