Monday, May 16, 2005

Wise Investment: Life Insurance

Well, I finally sprang for life insurance. Fortunately, my company has a pretty good set-up where I get a fair amount for fairly cheap. It's a good shake.

I still don't have as much as I should have. How much is that, do you ask?

If you have kids, your best bet is to get 10 times your household income in term life insurance.

Why? Well, the first part--the 10 times your household income--is so that the money can take the place of working. Invest the entire amount somewhere where you'll get around 10% return on your money, and you'll be able to continue your current lifestyle without working, living just off the interest.

Why buy term, rather than whole life? A couple reasons. First, it's way cheaper. Second, if you're following a financial plan, you should have a good idea when your plan will replace the insurance. If you have $300,000 in insurance, get term insurance for the amount of time it would take you to get $300,000 sacked away yourself.

Obviously, if you're saving about 10 percent of your income, this would be about 10 years. Figure fifteen just to be safe. So get 10-15 year term insurance for 10 times your income.

Again--it doesn't even have to be your income. If you are a single parent, you would want to get enough to pay off any debt you had, with 10 times the amount it would take whoever you have legally designated to take care of your children to pay for them from year-to-year.

I don't recommend waiting for this. If you're young and healthy, you can usually get 10-15 year policies for up to a half a million dollars for under $20 a month. Nearly any budget can find room for that.

I am waiting for the debt to be paid off before I start making many investments, including my 401k, but not this one. My primary goal here is peace of mind, and I just bought myself a nice chunk of that, for just a little bit of money.

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