The Question to Ask when Choosing Term Life Insurance: What Are You Protecting?

We recently began working with a financial planner, and as part of our complete financial planning, looked at term life insurance options.

I’m putting this article about term life insurance under “Building Wealth” and “Master Your Money” but it can easily fall under the “Retirement Planning” and “Wealth/Life Balance” categories. It all depends on why you are getting term life insurance.

I know, the simple reason is “taking care of your family”.

But what does that mean?

The general rule is that you insure for 10 times your current salary. One of us, for example, went for the “30 Year Term, $1M coverage”.

But what about the partner or spouse? Should the other person ALSO get the same 30 year term, $1M coverage?

Actually, the financial adviser using the “general rule” formula was suggesting that the other get 30 year term, $1.5M coverage. We decided to first commit to the one of us getting 30Y $1M but wanted to think about the second coverage.

If you are choosing term life insurance, there are many questions you are considering beyond “what’s this costing me?”

We’re looking at life insurance primarily because we have a child, and we want to make sure if something happens to either one of us (or both of us), our child will be taken care of.

Let’s say you’re considering term life insurance for the same reasons. Now you have to look at 20 or 30 year term. Even if you just had a baby, in 20 years your baby will be an adult. Then your term life insurance is really protecting your child’s welfare and future, if your widow or widower is able and willing to work to replace your income and pay the bills.

If you choose the 30 year term, then your term life insurance is actually geared to protecting your spouse’s welfare and future. Because toward the end of the term, your child would be grown, independent, and hopefully employed. Your spouse on the other hand, is getting older, and in case of catastrophic illness or some life situation where he or she is no longer able to work, and you aren’t there to help anymore, your life insurance serves to make sure that your spouse is taken care of.

Usually people get term life insurance to cover major expenses like mortgages and living expenses for the surviving family members, to make sure that they won’t lose their house or are unable to buy food and have shelter if the household “breadwinner” dies.

If you don’t have a mortgage because you’ve paid off your house free and clear, then your term life insurance options have just increased. You no longer have a huge expense – the mortgage payment – to worry about. Now it becomes a matter of your wealth that you want the term life insurance to protect. The people involved are still the same – whether it’s child, spouse, or both – depending on the term.

You now have to consider whether you want to ensure that if you passed away, your foundational wealth will remain protected against catastrophic events. For example, you have accumulated $1M in disposable income or investment assets. You get a $1M term life insurance for 30 years to protect your spouse from having to touch the principal investments – the insurance provides a means of living in the long term and sustainable living is possible from dividends alone if the cost of living is not very high.

This is when you can begin to think about using term life insurance as a protection for your long term wealth, and the legacy that you want leave for your child/children and grandchildren.

Tags: financial planners, insurance, quality of life, term life insurance