The WHY & HOW of Life Insurance
By: Austin Colby, CFP®, MBA
I believe that everyone needs life insurance at some point during their lifetime. Few people need life insurance for their entire lifetime.
Life insurance should be used to protect someone from a catastrophic financial event when someone else dies.
WHY life insurance? In the event of someone’s death, would there be a catastrophic financial situation for those dependent on that person?
The definition of catastrophic financial situation is: involving or causing sudden great damage or suffering in the area of finance/money. There are a lot of events that are financially related, but not catastrophic. And, there are several unfortunate life events that will cause great damage and emotional suffering, but would not be financially catastrophic. You don’t need life insurance to protect you or anyone else from those events.
If someone is trying to sell you life insurance to protect you from any potential NON-catastrophic financial event, run the other way. Quickly.
Now, let’s look at the HOW. When buying life insurance you want two things:
the lowest possible cost to accomplish your goal
the most death benefit for your premium dollars (or leverage)
99.99% of the time purchasing term insurance is the best way to solve your life insurance needs. You can purchase a lot of death benefit for a specified period of time for a fixed, inexpensive cost.
There is rarely a reason to ever get a term policy for longer than 20 years. What you are doing with a 20-year policy is giving you and your protected ones a time frame to build personal net worth that will become your future life insurance.
Example:
you determine you need $1,000,000 of life insurance protection
you buy a 20-year term life insurance policy to cover that need
you now have 20 years to build personal, liquid net worth that will become your future life insurance
How do you build personal, liquid net worth? We’ll cover that another time…but here is a sneak peak: earn money, spend less, invest…repeat.
Do you need life insurance? Would it be a catastrophic financial risk if anyone in your life were to unexpectedly pass away?
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.