Why Do You Need Life Insurance?

I got a Facebook message last night, and this woman was talking about she had gotten an ad in the mail for accidental death insurance, and she got to read and saw all the exceptions.

You could get killed. You could get killed there, and all these kinds of stuff. She asked me questions about it, and I assist her, and I thought maybe some have the same questions. We haven’t talked about why we need life insurance. I’ve been telling you about how a great investment it is, but I haven’t told you about how to make sure you have an adequate benefit.

Why do you need life insurance?

Back when I started, 50+ years ago, somewhere in between there, a guy came up with a great concept called capital need analysis. It is the best way to figure out how your family is going to live once you’re gone. When we say “I do” and when we say “till death do us part,” we still have an obligation to provide for our family, and to be blunt, if you aren’t doing that, you are not doing the right thing. The Bible says, if you are not doing that, you are worse than an imbecile, and I agree a hundred percent. You can’t do it so cheap. You can buy a million dollars of life insurance today, if you are fairly young, for maybe a hundred bucks per month or maybe less than that – very inexpensive.

How the capital analysis works

It doesn’t matter if you have life insurance, you got 401k, you got a bank account – it doesn’t matter what you got. At your death, you bring it all together. That’s the capital because your income stops. Let us assume that you are making 50 grand a year. And people tell me, “Jim, I got a hundred thousand life insurance, I got plenty.” Then I’ll say, “How much money are you making?” “Well, 50 grand a year” “So when you die, your family got 2, 3, 4 years of income, right?” “Yeah, but that’s plenty. No, it’s not.

Here’s how capital analysis works, which I think still the best way to determine how much capital you need. So, what you do is to add up everything you got: your bank account, your 401k. You don’t include your house because your family might still live somewhere. You add up everything. Let us say you got a million dollars, including your life insurance. You say I am in great shape. Are you really? What would you do with that million? Your family’s got to live with that million the rest of their lives, particularly if you got a young family.

And are you going to suggest they spend the principal? Because if they do and they have an emergency, they got a problem. So what capital need analysis does is it says, let’s assume a reasonable rate of interest. Let’s live on the interest, and let’s leave the principal only to invade if there’s an emergency that we can’t solve in any other way. So today, probably, 3% is about the best you can get now on a safe investment. That’s 30 grand a year. So again, you go back to my example with the person earning 50. Now he’s gone, and he probably spends some money. He owns up one vehicle, uses gas, eats food, uses electricity, so you might cut down some, but you probably not cut down 20 grand.

Do you get the point? A million dollars is not a lot of money. It’s really not if you’ll going to live with the interest. Now, what if you’ll live with the principal? We’ll take 20,000 and divide it by 1,000,000. That would be 20 years, roughly 20 years of income, and what if you leave a young family? And you say, “Jim, I’m not making, we are barely getting by 50 grand. Hey folks, you can buy a million dollars of life insurance if you are 30 years old and above, probably making 30 to 60 bucks a year if you are not a smoker. If you are a smoker, you should pay more than you should because you are killing us too. If you think I hate smokers, you have to be correct. Life insurance companies know you die quicker because they charge you twice or three times for what you do.

I’m not gonna argue with you. You want to buy the cheapest charge, that’s what you can probably get. We can get you the cheapest charge around. We shop the whole market. A lot of times, we write a million-dollar policy for a 30-year old. Because again, if you take 3%, that’s 30 grand a year. That’s not a lot of money. So that’s the way you got by buying that, and if you buy regular life insurance, the only exclusions, you only got two exclusions that don’t pay, suicide the first year.

If you commit suicide, it’s not going to pay, and that’s fair. The second thing is called a 2-year contestable period. If you die in the first two years, the interest company reserves the right to contest your death, in other words, to check into it. And if they can prove that you lied when you took out the application. You didn’t tell them some things, maybe you had cancer, and you didn’t tell them’ you just kinda forgot to mention that, or you had heart throb, and you didn’t tell them that it just slips off your mind, well, you commit a fraud already. So obviously, it’s not going to pay. Those are the only two exceptions. Both of them, you commit fraud. Before it won’t pay, life insurance is going to pay. They look for reasons to pay, not reasons not to pay.

Let us assume, take the worst-case scenario, you got cancer today. You take out a life insurance policy. You pay your first year’s premium, first month’s premium, and you’re covered. You learned later that you got cancer but, you did not know today when you took the policy out, and you can prove. Then, you’re still covered. There have been people that have taken out life insurance policy paid first months premium and got rolled over and get paid. So don’t worry about accidental death.

It’s very, very cheap and the reason it’s very, very cheap is because it only pays if you die by accident. And you can argue the fact that most young people probably won’t die by accident, and that’s probably true. But also you got a lot of exclusions with our typical life, and you can buy a cheap insurance policy that charges you very, very low that pays everything except for the two things I told you about. If we can help you, you know the drill now, give us a call, give us a text.