A friend and respected life insurance guru, Jim Ruta, recently compared life insurance and ice cream; there are many fancy ice cream flavours, but his favourite is plain vanilla. Life insurance comes in many different flavors as well, but sometimes simple is best.
“Plain vanilla” is also the phrase that the late great Al Granum, of “One Card System” fame, called buying life insurance for the most basic of reasons; either because you love someone or something.
Like exotic ice cream flavours, some insurance solutions are complicated but appropriate for the situation. On the other hand, plain vanilla goes with just about anything, and basic life insurance can work in many situations, as explained below.
Life insurance is an unselfish product, because those of you who buy life insurance do so because someone else’s safety and security means as much or more to you as your own. There’s really no other reason to spend after-tax money that only benefits someone else after you are gone.
The question then comes down to just how much and what flavour? There are many complicated calculators and financial planning techniques to come to an answer. But, the plain vanilla philosophy suggests that simple rules of thumb and basic math can sometimes do the job.
For income replacement we often recommend that you buy 7 to 10 times your net income after expenses but before taxes. This is on the assumption that your family can invest this amount and provide an income stream for them. If your number is $50,000 then you would want to purchase $500,000.
Then you need to look at how much debt you have. All of your debts should be paid in full, including car loans, mortgages, credit cards, etc. If you have a $250,000 mortgage and a $20,000 car loan, you need an additional $270,000 in your policy.
Finally, you need to consider your future and ongoing obligations. Do you want to pay your children’s education, charitable bequests, support a family member, final expenses, etc.? Total these amounts with your income replacement and debts to come up with your insurance number.
Always be sure to buy the right amount of life insurance before you consider the “right” type. The amount of benefit is always the overriding consideration. Once you have the right amount, you can always improve the quality or flavour if you choose to. The idea is to take care of the people or the things you love first with a basic approach. And before you agree to that mortgage or creditor life coverage at you friendly local bank, please take to time to understand the difference between creditor insurance and personally owned. You may find that creditor insurance has an unpleasant after flavour.
Plain vanilla may not be fancy, but it can do the job. Start there by sitting down with a trusted insurance professional and figuring the right amount for your needs. While there, you can taste test other flavors and find out which your favorite is.
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