21—Lever #1: Your Income (Part Nine—Life Insurance)

Trust God but row away from the rocks

This is a continuation of a series of articles on your income and the risks to it. Of all the risks you face, a premature demise is the greatest for the obvious reason that you can't work for a living on earth after you've gone to heaven.

Once you experience heaven, you'll want to stay there. But anyone back on earth who is counting on you for some or all of the family's income may not be in as good a shape as you are.

We know that our lives are in God's hands. The Bible—especially the Old Testament—affirms that God has determined the length of our lives down to the days and hours. Consider Job 14:5, where Job speaks these words about man: “Since his days are determined, and the number of his months is with you, and you have appointed his limits that he cannot pass” (ESV).

Jesus also spoke of this in Matthew 6:27: “And which of you by being anxious can add a single hour to his span of life” (ESV)?

And there is the parable of the rich fool in Luke 12:13-21 where Jesus says, “But God said to him, “Fool! This night your soul is required of you, and the things you have prepared, whose will they be” (ESV)?

We all hope and pray that we will live long, healthy lives, but none of us knows exactly how long that will be.

According to the Social Security Administration's "Period Life Table," a 25-year-old has an average life expectancy of 49.82 years, to age 74.82. (If they reach age 50, their life expectancy goes up to 78.12.) However, approximately 2,074 out of 100,000 (2.1%) won't reach age 75.

Advances in medical science and healthier lifestyles will almost certainly change these statistical estimates in the decades ahead. However, one truth remains: Our lives are ultimately in God's hands; he has sovereignly numbered our days: “Your eyes saw my unformed substance; in your book were written, every one of them, the days that were formed for me, when as yet there was none of them” (Psalm 139:16, ESV).

It’s not as if we think we will never “shirk off this mortal coil and join the choir invisible”; we just have no idea when that will happen. And since we don’t know, we have to hope for the best but plan for the worst, which is an early demise from an earthly viewpoint.

When it comes to transferring risk, the risk of a premature demise is on the catastrophic end of our risk continuum:

That's because, even though the probability of a sudden, early death for a young adult is very low, the potential impact, especially if they are the primary income earner for a young family, is very high.

This is where life insurance comes in; it's a way of transferring the risk to an insurance company to help compensate for the financial loss of income accompanying the loss of life.

The younger you are, and the more dependent others are on you for income, the more you need life insurance. Plus, without income, there can be no retirement savings. Life insurance replaces at least some lost income. It can also help fund retirement.

On the other hand, if you are single with no family to support and have some money saved up, you probably don't need it—not yet. But the answer is almost always yes if someone else relies on you for financial support.

Also, if you plan to marry and start a family, consider getting a life insurance policy early on because the premiums will be less.

When it comes to purchasing life insurance, things get confusing. This chart shows the main types of life insurance and their main features:

I have added some resources at the end of this article where you can learn more about insurance. These will come up later on when we discuss about investing, but here are some short descriptions:

• Term Life is simple life insurance for a specified period, typically 1 to 30 years.

• Permanent Life is simple insurance for life (no specified term).

• Whole Life is a permanent life with an investing mechanism inside it.

• Variable Life uses the financial markets as the investing mechanism.

• Universal Life is basically a hybrid term/whole life form.

I lean toward using renewable, fixed-term life insurance; it's simple and low-cost. You get a more considerable death benefit for the premiums paid, which is especially good for young families. Other "permanent" life insurance products, such as whole and variable life, may have a place (more on that later when we talk about investing), but they tend to be complicated and expensive.

Term life insurance is relatively easy to purchase. Many employers offer free group term life insurance as a part of their employee benefits package.

Typical employer coverage is one or two times base pay. It's free, yes, but the cost of insurance over $50,000 is taxable to you as "imputed income," according to a rate table established by the IRS.

Free is free (even with a little in taxes), but $50,000 or $100,000 may not be enough coverage, depending on your circumstances. You can often buy additional coverage through your employer, but I wouldn't necessarily recommend it. Employee supplemental life insurance is not subsidized but is offered at "group rates."

The good thing about employer life insurance is that it isn't medically underwritten, so you can't be denied coverage. And since there is only one rate group, you will pay the same as everyone else.

But here's the "catch”: group rates tend to be higher than they would be for healthy people and lower for unhealthy ones in the open market.

Deciding how much insurance to purchase can be complicated. A simple rule of thumb is your income times 15 and a policy for a term as long as you think your survivor will need the income. So, someone making $80k would buy $1.2Mil. of insurance. Life insurance is no longer required once a family is financially independent (typically in retirement, but it can be sooner).

But suppose you are a young couple with no children, and one of you should pass away prematurely. In that case, there is a greater than zero probability that the surviving spouse will remarry and, as a result, find themselves in a better financial position than had they not done so, especially if they weren't the primary income earner. That may mean you can purchase less insurance than the 15 times income that is often recommended.

The insurance business is a little strange. The large companies are national, but they are licensed and regulated at the state level, and the insurance rates are filed with each state's insurance department. (That’s why you’ll always be asked for a zip code when you ask for a quote.)

Many insurance policies are sold by "agents" (sometimes presenting themselves as “financial advisors”) who are paid by commissions and may use high-pressure sales tactics. This is further exacerbated by some products paying higher commissions than others.

If you decide to purchase a term life policy and don't mind working with an agent, I suggest using term4sale.com. The site doesn't sell insurance; it will help you compile and compare quotes from many companies with contact information for independent agents in your area (they don’t share any of your personal information).

You may be thinking, can't I get lower rates if I buy directly from the insurance company? Can't I compare rates and purchase insurance in one shot on websites like Policygenius, AccuQuote, SelectQuote, IntelliQuote, etc.?

Maybe, but working with a local agent is still a good way to buy term life insurance. You can talk with a real person who understands the business. Plus, rates are based on your "health underwriting class" (remember our “risk pools” from earlier?), and not all companies structure those classes similarly. You may get a better rate with one company than another, and a good agent can help you do that.

Call a different one if the agent tries to "up-sell" you to a more expensive whole life, universal, or variable life. If you'd like to do it all online, you can do that instead of using one of the sites I listed above. They will make it pretty easy.

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For reflection: Do you have an aversion to purchasing life insurance? What are your reasons? You have freedom in this area, but consider the biblical wisdom of trusting God while also doing what is within your power to protect your family’s finances. “Trust God, but row away from the rocks.”

Verse: “So whoever knows the right thing to do and fails to do it, for him it is sin” (James 4:17, ESV).

Resources:

Term4Sale

Investopedia: Deep Dive on the Different Types of Life Insurance