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Money Guide – Insurance

The following is adapted from “Living in the Village: Build Your Financial Future and Strengthen Your Community” by Ryan C. Mack.

– Everyone needs insurance..no exceptions
– Insurance Shouldn’t Be the Largest Expense in Your Budget
– Conduct an Insurance Needs Analysis Before Meeting ANY Agent

– How to Conduct an Insurance Needs Analysis
– The Different Types of Insurance
– How to Avoid Predatory Insurance Practices

When you think of insurance, what’s the first thing that comes to mind?

  • “I’m too young for life insurance. Maybe when I’m older but right now I’m just living my life.”
  • “Shoot, I’m not trying to make everyone rich off my death!”
  • “No spouse, no kids, no house…no need for life insurance.

Sure we can think we’ll be like Jay-Z and be “Forever Young,” but the reality is that young adults pass away every day and often leave their families with unintended financial burdens. No, you shouldn’t live each day afraid of dying, but wouldn’t you like to truly live freely knowing that you’re prepared in the event of your premature death? One of the ways to accomplish that is through life insurance. But don’t just buy the first insurance policy thrown at you. Use Money Guide: Insurance to make sure that you have adequate coverage, pay premiums within your budget and avoid predatory insurance practices.


We can’t tell you how many people who have fallen victim of a term we call “insurance piling.” If you ever talk to someone and they have life insurance policy, on top of policy, on top of policy, more than likely a few agents have paid them a visit and convinced them of the need to purchase more insurance. The easiest way to figure out exactly how much insurance you need is to do an “insurance needs analysis.”

An insurance needs analysis is a calculation that determines the total amount of life insurance you should purchase. It takes into account your current assets and liabilities and also looks at what your family’s immediate and future income needs would be upon your death. To avoid purchasing an unnecessary amount of insurance, review the information below before purchasing your policy:

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1. What assets and insurance do you have?Take into account the following:

  • Liquid Assets – Cash, CDs, money market accounts, and any other investments.
  • Disposable Assets – Rental property, business assets, cars, and anything of value that can be sold.
  • Total Amount of Existing Insurance Policies – group insurance, personal insurance, mortgage insurance, etc.

Total Amount of Assets = ___________________

2. What is your total amount of liabilities and cash needs?

There is a common saying that many people don’t leave wills, they leave bills. The bills we leave behind do not vanish. Below are a list of cash needs and liabilities that you might want to take into account in your insurance needs analysis:

● Total amounts of mortgages that you owe.
● Total amount of other loans and debt that you owe including credit cards, bills, monies owed to collections, etc.
● Expenses that occur in death, including lawyer fees and other estate administration expenses; funeral expenses; and income and capital gains taxes.
● A college education fund for your children. You should prepare for at least $12,500 per year of college per child, although costs of college can go as high as $35,000. Keep in mind that the more costs accounted for, the higher the costs of your coverage. .
● Costs for the care of aging parents.
● Costs for child care through college.

Total Amount of Liabilities and Cash Needs = ____________________

3. How much income will be needed by your dependents/survivors in the event of your death?

With your debts taken care of, there is still a need to replace the income that you would earn, because there might be survivors who are dependent upon your income. Listed below is what comprises this principle:

  • Annual income provided to survivors – This figure should be approximately 70% of what you are currently earning. It is not 100% because many of the bills that you are paying for expenditures such as mortgage payments, child care, and bills are accounted for.
  • Years of that income to be provided – This number should come with much thought and consideration because the more years you choose to replace income, the more coverage you will need, and the higher your premiums will be for coverage. It might be nice to provide income replacement for your spouse for 20 years, but do they need that many years? It might be nice to provide replacement for your children for 30 years, but will they need your income after they graduate from college? Won’t they be financially dependent when they start working? Remember, we are only focused on what you feel you NEED, not what you want. We’re sure that the insurance agent you see will feel very happy that you want to replace income for 20 years, because they see a hefty commission check in their near future.

Annual Income Provided x Years of Income Provided = _____________________

(Note: This value DOES NOT take into account the time value of money or inflation. The actual amount of this figure when taking this into account will be less.)

To get a rough estimate of the amount of insurance that you need you should add the final values in 2 and 3, and subtract 1 from this figure. To get a more precise estimate before you head to the insurance agent “How Much Insurance Do I Need” calculator.

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There are many types of insurance and you should become familiar with most of them before you purchase your policy, as a result, you’ll be able to determine what is best for you and your family without breaking the bank.

Term Life Insurance – This is the simplest form of life insurance and is only provided for a term of your life (e.g., five, ten, twenty, thirty years). After the term has elapsed, you are no longer covered and the policy expires. With this coverage you can generally purchase large amounts of coverage for little money. These policies are well suited for families on a limited budget as it is not atypical to be able to purchase $250,000 worth of coverage for as little as $30 per month depending upon age and health.

Whole Life Insurance – This coverage lasts throughout your life as long as you continue to make timely payments. If a family elects to get $250,000 worth of coverage, then it is guaranteed to remain in force for their entire lives. Unlike term life insurance, whole life has a guaranteed cash value that, if they surrender the policy, would be available to them or they may borrow against it at the current policy interest rate. Whole life also pays dividends that can be returned to the policy owner as a reduction in premium as cash or be applied to the policy to increase the payout. The biggest drawback to whole life insurance is its price. It is by far the most expensive insurance policy to purchase. That $250,000 worth of coverage that cost $30 per month for term can cost up to $250 per month for whole life insurance or more depending upon age and health.

Universal Life Insurance – The compromise between pricey whole life insurance and cheap term insurance is universal life insurance. This policy has flexible premium and an adjustable benefit that accumulates in value. This policy is cheaper than whole life but the cash value is not guaranteed. A $250,000 universal policy might cost as much as $150 per month depending upon age and health. However, the premium is flexible, so if the family does not have the full $150 for the month and can only pay $100, the policy will draw the $50 they are short down from the cash value to keep the policy in force.

The purpose of insurance is to protect the income of a bread winner. It should never be used as an alternative to proper financial planning. It also should not be the most expensive item in your budget. The Money Movement is a strong advocate of term insurance. It is the most cost effective way to protect most families.

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Make sure that you know exactly what you are paying for when reading the contract. There are many things that you might want to be added to the policy that make it much more beneficial to you as a policy owner, such as the following:

  • Waiver of Premium – This allows you to paying the premium if you become disabled. Most policies have this but some do not; be sure to ask for it.
  • Non-Cancellable Clause – This can be an expensive option to add to your policy, but it prevents the insurance company from being able to cancel, change the terms, or increase your premiums of your policy for any reason.
  • Inflation Rider – This feature will automatically increase your face value each year to keep pace with inflation. Although your premiums will go up with every increase you don’t have to worry about inflation eroding your face value.

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There is a term that The Money Movement would like to introduce to you. The term is “predatory insurance” practices. Almost everyone has heard of predatory lending practices. However, predatory insurance practices are actually more prevalent than predatory lending practices; we just don’t hear about it. This is because the insurance industry is still not highly regulated and its effects aren’t as obvious. If an agent sells you a home that you cannot afford you may be forced to go into foreclosure which is a life changing financial bind. Your credit suffers, you potentially go deeper into debt, you are displaced from your home, and entire litanies of financial issues confront you. However, predatory insurance practices frequently go below the radar unnoticed by all except the insurance agent and your savings account.

So how do you spot predatory insurance? It happens every time an insurance agent convinces someone to buy more insurance than is needed to provide for household needs. Here’s an example. A 35 year old man, let us call him Bill, wants to purchase life insurance for himself to provide for his family in case something happens to him. He goes to Mr. John Crooked, the life insurance agent, and Mr. Crooked tells John that he should purchase a five million dollar policy.

Mr. Crooked goes into full sales mode saying things like the following:

  • “Don’t you care about your family?”
  • “This is how the RICH take care of their children.” (This strategy plays upon the fact that most in America, even if they are not considered “rich,” want to do the things that the rich do.)

After Mr. Crooked drills the sale into Bill’s head, he falls victim to predatory insurance practices and buys the $5M policy when he only needed $750K to cover his needs. This was a $395 mistake.

Conducting an insurance needs analysis and reviewing the different types of policies available will help you stop Mr. Crooked in his tracks when he comes your way.

Didn’t find what you were looking for in Money Guide:Insurance? Send us an email at info@moneymovement.org and one of our experts will get back to you.

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