All About Life Insurance

Life insurance is confusing. There are so many options out there: term, whole life, universal life. Do you need life insurance? How much insurance do you need? What type of policy should you buy? I’ve been doing a lot of research on the subject lately and I want to share with you what I’ve learned.

Do you need life insurance?

What is life insurance?

Life insurance is an insurance product that pays a lump sum of money to someone, called a beneficiary, when you die. You can have multiple beneficiaries if you wish. The amount that is paid is based on the face value of the policy. The money transfers to the beneficiary tax free and is not considered part of your estate (for will or probate purposes).

There are essentially two types of life insurance: term life insurance and whole life insurance (also called universal life insurance).

Term life insurance is available for a certain term length, typically 10, 15, 20 and 30 year terms. You pay a level premium for the length of the term and when the term expires, you no longer have life insurance. This is like car or homeowner’s insurance with a longer term. This is the least expensive way to get life insurance.

Whole life insurance is meant to cover the insured for their entire life, as long as the premiums are maintained. The monthly premium can increase over your life. With whole life, you will pay more each month to build up cash value, which is a savings account inside the policy. This savings account can be borrowed against or used to offset the increases in the premiums as you get older. If you borrow against the cash value and die while the loan is outstanding, the amount of the death benefit will be reduced by the amount of the outstanding loan. Typically, whole life insurance is 20 times more expensive than term insurance because of the cash value that is building up inside the policy.

Who needs life insurance?

You purchase insurance because you cannot afford to pay for a loss that might occur, like the loss of a car or home. You have health insurance because you cannot afford a major medical event out of pocket. Life insurance should work the same way. You need life insurance to take care of those who rely on your income should something happen to you because you don’t have sufficient assets to take care of them if your income was lost.

Typically, we think of taking care of a spouse and young children when we think of life insurance and you absolutely need life insurance in that case if your family cannot survive the loss of your income. You should have about 10 – 12 times your annual income in life insurance so that those who are left behind can live off the proceeds if they are invested wisely. If you currently make $50,000 per year, a $500,000 – $600,000 policy invested at 10% would replace your income without touching the principle.

Another group that increasing needs life insurance is recent college graduates. More and more college graduates are leaving school with cosigned student loans. When you die, your assets would go to pay off your debts first. If there are any outstanding debts left after your assets are liquidated, the debts go unpaid. That is true unless you have a cosigner. While some student loans are being forgiven, most private loans are not. If you have a lot of private student loans, it may be wise to get life insurance to pay off your student loans should something happen to you. You can name the cosigner as the beneficiary of the policy.

If you have a large nest egg, no debt and your family would be fine financially should something happen to you, you probably don’t need life insurance. You should speak with a financial advisor to evaluate your situation. Make sure to ask questions and make sure you really understand what you are purchasing before you buy.

What type of life insurance is best? 

I have always heard Dave Ramsey say that whole life was a bad choice because it was so much more expensive than term insurance. After doing my research, I completely agree with him.

I got a quote for term and whole life insurance. For a $1,000,000, 20 year term insurance policy the rate was $50.45 per month. For a $1,000,000, whole life policy the premium was $1,020 per month. Quite a difference there. So let’s say that you purchased a 20 year term policy and invested the other $970 per month. At the end of the term policy, you would have approximately $939,000 in investments. Not quite $1,000,000 but pretty close. If you let that money grow for another 20 years, you would have over $9 million. If you had purchased the whole life policy, you would have paid over $1,000 a month for 40 years and your beneficiaries would only get $1,000,000 when you die. $9 million sounds a lot better to me. Even if I’m half wrong, your beneficiaries would still get $4.5 million.

But what about that cash value that builds up? When you die, the insurance company keeps that. If you take out a loan against the cash value and you die, the amount of the loan is subtracted from the face value. Kinda sounds like you really don’t get much for that cash value, huh?

Do your homework!

Never buy anything because your investment advisor, your insurance advisor or anyone else (including me) tells you to. Do your homework! Look at all of your options and make an informed decision. I am not an insurance advisor and have based this post solely on my research. I got an insurance quote (both quotes were actually from the same company) and used an investment return calculator to see how much money I would have if I invested the difference. Your numbers might work out differently.

What questions do you have about life insurance? Do you have life insurance? 

 

We did it!

Yesterday was a big day in our household. Yesterday, we paid off our last credit card.

When we started this journey a little more than four years ago (about the same time I started this blog), we weren’t sure this day would ever come. Let me take you back to the beginning.

Where does it go?

A few days ago, I asked followers on the Facebook page what aspect of finances they wish they knew more about. My friend Patrick joked “how to keep the money that gets deposited into my account to remain in my account.” It was a funny response but it got me thinking about how things were before we had a budget. I remember asking myself at the end of every month: where does it all go?

Since we started doing a monthly budget, I don’t ask that question any more. I know where it all goes and it goes where I tell it to go. Before we started doing a monthly budget, the thought of putting it all down on paper seemed daunting. It would be so much work, it would be hard to manage, it would be…(fill in your own excuse here).

The first month it was a bit of work. We had to figure out what we were spending our money on. We then had to make an effort to cut back on that spending and track where our money was going.  The second month, it was easier. By the third month, it almost seemed automatic. The budget doesn’t change much for us since our income is pretty steady. Since we budget for pretty much anything that can happen around here, special occasions and other unexpected things don’t come and bite us in the butt.

Starting a budget is easier than you think. Get out a sheet of paper or open up your spreadsheet program on your computer. Write down your expected monthly income. If you are salary this is much easier. If your pay fluctuates, use the minimum amount you would expect to get paid that month. Don’t include overtime. I’ll show you how to figure that in later.

After you’ve got your income at the top, it’s time to spend it. Spend it all on paper. Start with the basics: food, shelter, utilities, transportation (gas, insurance, repairs). Next list out the minimum payments for all your debts (car loans, student loans, credit cards, personal loans, etc). After that, list out the other stuff: donations, life insurance, hair cuts, clothing, gifts, entertainment and anything else you can think of. It helps to go through a few months of bank statements to see what you spend money on.

Some items, like repairs and gifts are spots where you put a bit of money each month so when your alternator dies or the holidays come around, you’ve got some money put away.

Is there money left? If the answer is no, then you need to go back and find somewhere to trim back. You need to be at zero when you are done.

If the answer is yes, this is where things get interesting. Take out a second piece of paper. This is where you make your to-do list. First write down Emergency Fund and put $1,000. Next write down all your debts from smallest to largest, except for the mortgage. Every month that you have something extra, you put it toward that list. You’ll start to see items fall of that list rather quickly.

No debt? You should try to save up three to six months of expenses in a savings account. You never know when you or your spouse might lose your job. After that, add other things to your to-do list. Maybe it’s saving for a car or a vacation. The sky is the limit here.

If you want more information about this, check out The Total Money Makeover. Dave Ramsey is one of the best financial folks out there. It’s not get rich quick. It’s more the tortoise and the hare approach. Buying his book years ago was one of the best purchases I ever made.

Today’s photo courtesy of Salvatore Vuono and freedigitalphotos.net

Financial Peace University for $59! Ends Thursday 10/22

Dave Ramsey’s Financial Peace University is on sale until Thursday. The online edition is just $59. You can also get other versions on sale. If you’ve always wanted to attend FPU, there is no longer an excuse.

Jeff and I think the program is great. We attended live at a local church but I think with all the online support, the online version would be good too. If you have any questions about FPU, please post them here.

Staying motivated

Where did this week go? I can’t believe it’s Friday already.

Sometimes, I think the hardest part of being frugal, staying on budget and paying off debt is staying motivated. It’s hard living like no one else so someday you can live like no one else (Dave Ramsey). You see people around you going on vacation, going to ballgames and concerts, and doing things you wish you could do. There are always going to be things you want and the temptation to spend is always going to be there.

I’ve developed a lot of ways to keep our motivation going. Setting goals and seeing those goals come to fruition is a huge motivator. Last night, we paid off a  debt in our snowball. I can’t tell you how awesome it is everytime we knock one out. We plan what we’ll do with the extra money when everything is paid off.

I don’t go to places where I’ll spend money. I don’t hang out at the mall. I don’t go to bookstores to look around. Those are dangerous places. I find alternative ways to entertain myself.

I surround myself with people who are also motivated. I’ve joined a debt free group on Ravelry (a knitting site I’m a member of). I’ve also joined Living Like No One Else, a forum for people following Dave Ramsey’s plan. Seeing the successes other people are making is really motivating. It’s also a great way to get support if you are tempted to fall off the wagon.

Writing the blog is also huge motivation. I love sharing my wins with all of you and even sharing my frustrations sometimes as well. Helping others helps keep me straight.

How do you stay on task with your financial goals?

I hate cash

I’ve posted here about trying to use cash for certain things, like groceries, because Dave Ramsey recommends it in FPU. Well, I’m here to tell you that I have given up on cash. I use my debit card for everything except purchases at small businesses that will accept checks. I write checks to save the business the credit card processing fees and I can write a check pretty fast. I hate using cash. I don’t like having cash on me, it’s slow and it’s more difficult to track. With my debit card, I know I spent $2 on a coffee and $1.50 on a copy of the WSJ. With cash, I only know I spent $3.50 today. With my debit card, I don’t have to count out the money and then hand it to the cashier and wait to get change back.  I know that statistics show that people tend to pay more with debit cards, but I’m on a very strict budget and have to stay within that budget. I am very good at sticking to that budget.

So, I tried. The only things I’m going to use cash for are large purchases. That way I can flash the cash to get a better deal. Other than that, it’s debit all the way.

How do you feel about cash? Does it drive you crazy? What’s your favorite way to pay for things?

Last month’s budget a success

While I haven’t been talking about it, I am still attending Dave Ramsey’s FPU. I’ve decided to wait until the end of the program to do a full analysis of it. There are some weeks that have been really interesting and some that have not, therefore I want to wait until the end to give you a good impression.

There is one aspect that I want to discuss now since I think it’s worthwhile to many of my readers. The program encourages participants to create a zero-based budget each month. I think this might be the best part of the program so far. At the beginning of May, Jeff and I estimated our income for the month. Since I’m self employed, I use a low-balled figure for my income. It’s an amount that I know I can make each month without a problem. We then sat down and spent it all on paper. Food, housing, transportation, utilities, fun, personal needs, debt payments and donations were all budgeted. We spent every penny on paper.

I can’t tell you how little you worry about money when you have a plan. You don’t find yourself wondering if you are going to have enough money to pay extra on the debt or how you are going to come up with the money for that large auto repair bill in a few months because you’ve already budgeted for it. As you spend money during the month, you need to have a way to compare your actual numbers against your budget. You can use a personal finance program, like Quicken or Money. Dave Ramsey subcribers get access to Gazelle Intensity, which is what I’m currently using to do our budget. You can use Quickbooks if you have a copy of the software and download your banking information into the program. You can use a spreadsheet or paper and pencil. You just need to have some way to know where your money is going.

Last month, there were a couple things were were over budget on (silly me for forgetting to budget for medication when we are in the middle of allergy season), but there were more categories that we were under budget on.  All that extra money was rolled into planning accounts for future use. For example, I had about $60 left in my gasoline budget. That $60 is going into my savings account as part of my car replacement fund. Money I budgeted for gifts (including Christmas) will go into the savings account until Thanksgiving and then will be transferred back into checking.

I know this sounds like a lot of work. I won’t lie to you. It is a lot of work the first month you do it. I suggest you do your budget on a spreadsheet or in a program that allows you to copy your budget from month to month. If you do that, your second month should take you about 20 minutes. I just copied May’s budget, changed a few numbers and was done. The tracking should be done each week and will probably take you about 30 minutes depending on how much banking activity you have. I just download everything into QuickBooks from the bank and then review where we are compared to the budget.

I really love the idea of zero-based budgeting. Know where every penny is going before you spend it and then you don’t have to worry about it for the rest of the month. You have a date book or calendar to plan your schedule, right? Why not plan your money the same way?

Got Hope?

If you’ve visited the site, you know I’m a huge Dave Ramsey fan. Last night, he held a Town Hall for Hope, which was broadcast on TV, Radio and 6,000 locations worldwide. We watched it at our church.  He made a lot of wonderful points.

One of the best messages from the entire night was you’ve got to stop being afraid. Fear is killing the economy. The media keeps telling us this is the worst economy since the Great Depression. They tell is this is the next Great Depression. Really? How soon we forget.

During the Great Depression, the stock market dropped 89% and unemployment went as high as 25%. At it’s lowest point this year, the stock market dropped 57% from it’s all time high. The market is up 22% in the last seven weeks for an overall loss, since the all time high, of about 45%. The unemployment rate in February was 8.5%. That’s only 4% above full employment.

But Kristin, what about housing? Housing is a mess! There are problems in the housing market, but many of the foreclosure problems are localized. Here are some stats from Dave’s site (I’ve seen them elsewhere as well):

  • 50% of United States foreclosures in 2008 came from 35 counties in 12 states.
  • 20% of the United States’ population lives in these 35 counties.
  • Eight counties in Arizona, California, Florida and Nevada were the source of 25% of foreclosures.
  • 4.7 million homes were sold in February, 2009 alone, and only 860,000 homes were repossessed all of 2008.

I know there are homes in your area that are being foreclosed upon and it’s affecting your home value. My house has also lost value, but my house is where I live. It’s not an investment for me. It’s not an ATM. It’s my home. My ultimate goal is to pay off that home so I don’t have to pay for a home anymore. I’m not looking to upsize every few years. I’m not looking to cash out my equity to buy a car. I’m happy with the house we bought. It needs some work but I love the character and we plan to stay in this house. We plan to pay off this house and live debt free someday.

I have hope. I’m not afraid of the economy because we are in a better financial situation than we were in before. We’ve saved up a small emergency fund. My husband’s job is pretty safe and he works in a good field where he could get another job. Maybe not here but somewhere. I’ve got skills and we don’t rely on much of my income to live. There is still a lot of demand in my field and worst case scenario, I could go wait tables if I had to and we’d still get by. I’m not afraid to work.   Dave quoted his grandmother last night during the town hall; she would say “There’s a great place to go when you’re broke: to work!” Brilliant!

I’ve decided I’m not participating in the recession anymore. By that, I mean I will continue on the plan Jeff and I put in place. We will continue to save, we will continue to give, and we will continue to spend. Although, I gotta tell ya if the economy thinks it’s going to recover on the amount we spend, it’s got another thing coming.

How is the fear affecting you? Are you ready to let it go or did you not allow it to grip you in the first place? What are you doing to weather the downturn?

Financial Peace University: Week 1 reaction

Jeff and I started Dave Ramsey’s  FPU yesterday at our church. Financial Peace University is a 91-day (13 week) program to help get you back on track financially. I have already read Financial Peace Revisited and The Total Money Makeover. We’ve been using Dave’s strategies for over a year and paid off about $13,000 in debt last year. In the last 30 days we’ve paid off one credit card and one student loan. We decided to do the program to help jump start our budget and really get things moving. Our goal is to get everything, except the house paid off in the next two years before we start a family.

The sessions work like this: each Sunday, we meet for two hours. For the first hour, we all meet together and watch the video for that lesson. Then we meet in small groups to discuss the lesson and our own personal situation. Everyone agrees that whatever is said in the small groups is confidential. Doing that really helps people to open up and share. We have a large number of people taking it at our church. Over 60 people signed up. There are people in all age groups. There are people in all different situations. For me, I think it’s great to have the small group discussions so you can get feedback and support from other people. It keeps me motivated to keep going.

The first week is about saving and the introduction of the baby steps. The first baby step is to save $1,000 in an emergency savings account. We have already done this, since we’ve been following the plan. He wants you to do this in the first month of the program. If you household income is less than $20,000, he suggests you put $500 away. He then jumps to step 3 to discuss having three to six months of expenses in savings. While we are on savings, we should discuss savings, right? The part that bothered me was that there was no discussion of how to get there. I thought maybe it would come in the discussions. It didn’t. I thought maybe it would come in the reading from the book (as part of the homework, you were supposed to read a couple of chapters from Financial Peace Revisited), which I reread last night. It wasn’t in those chapters either.  I went through the CD’s and the online resources. Still no suggestions. I haven’t checked out the message boards yet. I’m sure there are probably suggestions and discussions there.

The one message I did really like from this week: Look at your emergency savings as insurance, not an investment. This is your insurance plan in case your furnace stops working or your car breaks down. The one change we are going to make is to open an Electric Orange Checking account so that if we do have an emergency, I can write  a check from that account to pay the bill. That way, I don’t have to put the emergency on a credit card while waiting for the Orange savings account to transfer the funds to my regular checking account. It would be too easy to carry a balance and use that transferred money for something else.

My fear is that some people will look at the first baby step and think that this just can’t be done. If you had to save $1,000 in 30 days, how would you do it? Where would you cut back or how would you increase your income?

Have you attended Dave Ramsey’s FPU?

Next week, I’m starting Dave Ramsey’s Financial Peace University at my church. It’s a 13-week financial course, two hours per week. I’m sure some of you are thinking Kristin, you’re a CPA. Why are you attending a financial course? I’ve read two of Dave’s books: The Total Money Makeover and Financial Peace Revisited. I loved both of them. Jeff and I are currently using Dave’s budget. Plus, there are always new things to learn. I’m still not sold on his cash system (paying for everything with cash, no debit cards). Maybe after the course, I’ll feel differently. I also know some of the couples that are going through the program, so this is like a 13-week support group to get us all jump started.

I am pleased to announce that we paid off our last appliance this week. We purchased all new appliances, one by one, after we moved into our house. They were all old and needed significant repairs. We purchased them all with interest free financing and paid the balances before the 0% period expired. Last night I made the last payment on the washer and dryer. We are also planning to pay off one of our student loans this month. It was a small student loan that I took out my freshman year in order to pay some expenses my other loans didn’t cover. It feels awesome to knock down our debt. I was also able to purchase 2 new computers this month (yes, I said two. That’s a blog topic for another day) with cash and without touching my savings.

I was paying a few bills last night and decided to pay the utility bills and the credit cards so I could determine if we had enough to pay off the student loan. I realized that I could not pay these bills because I had paid them last month as soon as the bills arrived and the new bills have not arrived yet. It feels so good to be that far ahead. I hope you have reached that kind of financial peace. I know we still have a long way to go, but it feels good right now. If you haven’t reached this point, consider picking up one of Dave’s books.

Have you attended FPU? What suggestions do you have for those about to start? Do you need to read Dave’s books before attending? Have you attended other financial workshops that you thought were good?