Beating Broke

Personal Finance from the Broke Perspective

How Much Life Insurance Do I Need?

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Life insurance seems like a second thought to so many people.  You’ll notice that the title of this article isn’t “Do I Need Life Insurance?”.  That’s because there really isn’t much question about whether you need life insurance or not.  I suppose there might be a few exceptions, but pretty much everyone needs and should have life insurance.  It’s just a matter of how much you need.  There’s a couple of ways to figure out how much you really need.

How much life insurance can I afford?

This is probably the most popular method of choosing life insurance.  And it’s completely wrong.  If you ask most people how much life insurance they can afford the answer is almost always “little” or “none”.  Again, wrong answer.  Most of us carry car insurance because it’s something that covers us against a loss.  If our car is damaged in an accident, we have the insurance to help with the cost of repairing or replacing the car.  To the people who depend on us for income, we need to have life insurance in place to help with the costs of continuing on when our income is lost.

How much income do I need to replace?

This question is usually a pretty good place to start when determining how much life insurance you need.  If you’re a regular budget-maker, you probably have a pretty good idea of how much income you and your family need to pay the bills and keep food in the fridge.  It’s probably not your entire salary, but it might be close.  Take into account any investments you have, as well as assets that might become unneeded if you die.  You’re family probably won’t need that second car anymore, for instance.  Also, any payments on those assets that can be disposed of can be discounted as well.

How long do I need to replace the income?

Once you know how much income you need to replace, the next question you need to ask is how long you need to replace it for.  In an ideal world, you’d be able to buy enough life insurance to set your family up for life.  Your spouse would be able to quit work and take care of the kids full-time.  You’d be able to pay for the children’s college education.  But, the world we live in is far from ideal.  Most of us won’t be able to afford the premium payments on a life insurance policy that will pay out enough to do those things.  In a romanticist world, your spouse would grieve for your loss for the rest of his or her life.  That isn’t all that likely either.  It’s far more likely that your spouse will remarry at some point.

All of that still leaves us without a real answer to the time question though, doesn’t it?  You’ll have to make some assumptions in order to really answer the question.  Assume that your spouse will get remarried.  Assume that you’re not going to be able to pay for your kids’ college education with the pay-out.  I think a good starting point is somewhere around 3-7 years.  Some will say that’s too long.  Others will say that it’s too short.  I don’t think there is a perfect answer.  And, when you’re faced with a question that has no perfect answer, you’ve got to find an answer that is as close as possible.

Calculate, then purchase.

You’ve answered how much income you need to replace, and you’ve got a pretty good idea of how long you need to replace it for.  Now, you’ve just got to put the two together and come up with how much life insurance you need.  Multiply the income number by the length and you’re in the ballpark. Let’s say that you determine that you need to replace about $30,000 a year in income.  You’re married to a real hottie, who shouldn’t have any issues with finding suitable future spouses, but you don’t want him or her to rush into it, so you use the 5 year length.  $30,000 a year X 5 years = $150,000.

You might want to add a bit extra for sudden expenses at the time of death, like funeral, casket, and burial.  But, that’s a pretty good ballpark number for how much life insurance you should buy.  Now comes the big step…  You’ve got to purchase it.  Find a good place to compare life insurance policies and costs and get all the information compiled.  Then pull the trigger and purchase the policy.

That will be the hardest part of the whole thing.  If anything does happen to you, your family will be thankful that you did.

The Smell of Napalm

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Napalm is a sticky, flammable substance that was invented in the 40’s, and used in several wars.  Because of it’s stickiness, it attaches itself to everything, then burns at somewhere over 800 degrees.  When it’s done, there’s no more jungle.  No more enemies walking around.  It’s vile enough, that it’s use on concentrations of civilians was declared a war crime by the UN in 1980.

By now, you’re probably wondering why a site about personal finance is discussing Napalm. Well.  Here’s the thing.  Debt is a funny thing.  Most of us have it.  Some of us have quite a bit.  And most of us would like to get rid of it.  In fact, most of us would just love to Napalm our debt.  One fell swoop.  Drop some sticky burning substance on it and have it gone in a few short minutes.  We’d like that so much that we buy lottery tickets, raffle tickets, and buy books and products that promise some get rich quick scheme.  People with debt are always looking for the debt Napalm.

We like to fantasize about what we would do if we won a couple million in the lottery and set our debt on flames.  Erasing it, with one fell swoop, while getting rich at the same time.  Much like Kilgore in Apocalypse Now, we love the “smell of [debt] napalm in the morning.”

Napalm: War on debt Crime

Instead, we’re given the “debt snowball“, or the “debt avalanche.”

The truth is that debt is so easily gained, we want to find a solution to it that is just as quick.  An afternoon with a credit card and a shopping mall can add thousands to the total. Thousands that could take us years to pay off.  We wish we could find the Napalm to incinerate our debt.

Some people think that bankruptcy is that Napalm.  But, as quickly as a bankruptcy can eradicate your debt, it doesn’t leave you without any scars.  For many years afterwards, you, and your credit score, will suffer the consequences of the bankruptcy.  Credit will be nearly impossible to attain.  Prospective landlords and employers are even running credit checks before renting or hiring people.

We need to stop looking for the Napalm.  We need to stop assuming that all is lost.  We need to take some responsibility, find ways to make more money, save more money, and pay down more debt.  We need to stop adding more debt.

If you want to get rid of your debt, it’s a slow burn, not a Napalm strike.  Even in the world of personal finance, Napalm is a war crime.

Original image credit: korea by the U.S. Army, on Flickr

All Is Not Lost

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I can’t tell you the number of times that, in our seemingly never-ending struggle with debt, that I’ve seriously contemplated just giving up.  Just throwing in the towel and saying f-it.  You know it’s bad when you catch yourself fantasizing about it.  About how much easier your life would be without the struggle.  Just declaring bankruptcy, taking the hit on your credit score, and moving on with your life.

Even now, after having written about personal finance for over five years, I still find myself in that place occasionally.  We let our budgeting lapse, and inevitably our spending gets out of whack again.  Something happens, and the emergency fund just doesn’t seem to cover it all.  Or, worse, doesn’t seem to replenish itself as quickly as it should.

someecards.com - I can't believe I work this hard to be this poor.I can try and lay the blame somewhere.  That always helps, right?  If it isn’t my fault, then I can’t be blamed for it.  I can’t be the one that everyone points to as the failure.  I can deflect that attention to someone or something else.  That helps.  Until it doesn’t.

Every single time, it’s really me that deserves the blame.  It wasn’t the boss that refused to give me a raise.  It wasn’t the heater in the car that needed to be fixed.  And it certainly wasn’t the kids that needed to eat.  It was me.  Every.  Single. Time.

I failed to negotiate the raise.  I failed to have enough saved up to make that repair.  I failed to budget properly to make sure that we wouldn’t have to cut corners at the grocery store.  Me.  I did that.

I could just give up.  I could miss having to work harder to be paid appropriately.  I could miss having to pay attention to my budget to save money for car repairs, or to pay for groceries.  I could do that.  Giving up would be so easy.

Until it isn’t.