Money Monday: March 29, 2010

I was thinking a lot about life insurance this last week. Nothing will bring this kind of thing to mind like wondering if you’re actually about to face the Grim Reaper, right there in your own bedroom. (Hey, a tooth abscess may have been what killed Ramses II, you know.) (Alternatively, he may have been ninety years old and it was just kind of his time and oh by the way, he had a tooth abscess. Whatever. Point being, it might or might not have killed the Great Pharaoh.)

I read not long ago that fewer than half of the American population carries life insurance of any kind. And yet it is my unscientific observation that just about everybody I know has, at one time or another, sat through an awkward session with someone who was selling the stuff – universally speaking, it seems to be a very uncomfortable situation with high-pressure tactics and unsatisfactory outcome for at least one of the parties.

Either the turkey bought and the salesman is happy, or the turkey walked and the salesman has gone hungry.

I admit I hate those presentations as much as the next person. They set my teeth aching, they truly do…especially since it seems in my personal experience, the salesperson knows about as much about overall financial planning as they do scalar field theory. (I’m told it has something to do with physics. Or everything to do with physics. Something…physics-y.)

It irritates me because life insurance is an important part of financial planning, especially for those of us with families. It protects what you already have and provides for the goals you will now not be able to fulfill; the loss of either one of us around here would be an absolute nuclear bomb for the surviving spouse financially – like the emotional burden wouldn’t be bad enough, huh?

So, who needs it and who doesn’t? How much do you actually need? Can you just do it once and bang, that’s it for the rest of my life (or until the term of the policy is up, anyway)?

The answer is…it depends. It’s way too big a topic for a blog post – this is like the Cliff’s Notes version. The best thing to do is to research-research-research on your own; Life Happens is a good place to start.

The need for life insurance increases dramatically as the children start entering the picture; the keyword to me is dependent. As people become dependent on you, well, that’s when life insurance starts getting pretty darned important.

How much do you need? There are a couple ways that is generally calculated. The first way is the “multiple earnings” approach, which is crazy-lazy a very simplified way to come to a figure: Take your gross income, and multiply it by {3, 5, 10}.

There. That’s what you need. Ta da! Done.

Except that you’ve done nothing to actually assess your needs and you could be wildly off in any number of directions.

The other method is the “needs” approach. This one is harder, but not so hard that it should cause anybody to break out in a cold sweat.

You start with your immediate debt liquidation, for home mortgage, credit cards, auto loans, and so forth. (This, by the way, is protecting what you already have, right?)

You’ll also throw your (ahem) final expenses in here. Funeral costs can be scary-high, sometimes as much as a decent wedding, for carp’s sake. Think about what you want and plan accordingly. (Personally, I’d want a dirt cheap body disposal but darned good beer for the wake. I probably won’t care much about the body anymore or where it ends up, but I have a feeling I’ll care deeply about good beer well into the next life.)

The next thing to look at is your ongoing income needs. First, figure what you’ll need for monthly expenses going forward – if you’ve paid off the mortgage up there under ‘immediate needs’ you may need less, but if you’re having to add full time child care you may find you’re adding yet more.

From that, subtract your anticipated survivor’s benefits (Social Security, pensions, IRA disbursements etc.) and your ongoing or anticipated income. This is your net monthly need; multiply that first by twelve to get your annual, and then by the number of years you expect to need this additional income. This may be “until the youngest child is grown and flown,” or “until I retire myself.”

After this, take a look ahead. What goals remain undone? College funds for the children, or the surviving spouse? Beefing up the retirement fund? “Other”? Add those here.

Take a deep breath and total those things up. That’s the total income needs.

Now, take a second to list out your current available assets – what you have in savings and investments, or assets you can quickly and reliably liquidate on demand.

Subtract the current assets from the total income needs…and that’s your additional life insurance needed.

It may seem incredibly high. It may seem pleasingly low. It may be that when you start shopping around, you can’t afford what you want; the younger you are when you get started, the better your price will probably be.

When you have a good idea of what you need and what you want, shop around. Competition can be fierce, so getting multiple quotes is always a good idea. Also look at different pricing tiers; oddly (at least, it seems odd to me), you will occasionally find that more insurance actually costs less.

This is something an awful lot of us don’t think we need. It’s something for “rich” people, or for people who are up to no good, or for heaven’s sake, we don’t need that! We’re young and healthy and eat nothing but organic oatmeal, for heaven’s sake!

Practically bullet-proof…

Granted, statistically speaking, it’s a long shot. I don’t really think either one of us is going to drop in harness any time soon; I’m far too optimistic a person for that. And we are in good health, and young, and…well, not so much with the organic oatmeal. But we’re growing organic peas! And eating them! Usually right off the vine, which we find to be rather an amusing form of obsessive snacking…Normal People are going face-first into a bag of Salty Snack’Ems, and we’re out in the backyard snatching peapods off the vine and snarfing down those sweet little jewels as fast as we can.

But could it happen? Well, sure. Some idiot decides to pound back a six pack of beer and take his truck for a spin. I’m distracted crossing a street while someone else is distracted by their cell phone. My husband’s excessive love of bacon clogs up his arteries to the point of no passage.

At our ages, death tends to be very sudden. Not a whole lot of expecting it; just one glorious spasm of Something Stupid and that’s it.

…and the surviving spouse is left with a fistful of bills, a house full of kids, and a huge black hole where the emotional, financial and physical support of the other used to be…

That life insurance premium is the only bill I pay every month hoping that it will be an absolute, utter waste of money; but knowing in my heart that if the unthinkable happens, whichever one of us is left will be intensely grateful for all those “wasted” payments.

If you’re one of the just-over-half out there without it – look into it.

And I hope and pray you’re never glad you did.