Why do I need life insurance?
When I first started my career, it began as a salesman, selling life Insurance products.
Wow, I remember what Woody Allen said:
“What’s worse than death – being stuck in an elevator with a life Insurance salesman”.
Not very flattering or image boosting.
However, I prevailed and I recall my first client death experience very vividly even to this day, forty years later.
I had sold a $100,000 policy to a young married man with two young children. We both knew that he needed a lot more, however, that’s all he could afford. Less than one year later his wife called me and told me the shocking news. Even though, he was only thirty-three years old, he had a massive heart attack and died.
She was crying and pleading with me to help. She was being bombarded with funeral expenses, regular monthly bills, which she had never even looked at in the past, and was completely overwhelmed.
A few days later I rang her door bell and handed her a cheque.
She cried again, and explained how every time she answered the door there was someone there with their hand out, for some bill or other that hadn’t been paid. I was the only one that stretched out his hand with a cheque in it for her, $100,000.
So imagine if you would, her husband being a very special machine in the basement. And every Friday she could go down, and press a big red button on this machine and out popped a cheque for their weekly needs. Now that machine has stopped working. No more weekly cheques.
Insurance can be that machine which provides those weekly cheques.
How much life insurance do I need
For this illustration let’s assume there is only one breadwinner and the other partner being very involved with the upbringing of the young children. The breadwinner brings home net after taxes, $45,000 or $865 weekly. His or her annual gross income is $75,000.
So the question is, how much life insurance would provide $45,000 net after taxes, if that life insurance lump sum could be invested at a reasonable rate of return. In my opinion, 5% return on capital would be a very achievable rate, with reasonable risk, without over stressing one’s stomach level. $1,500,000 invested at 5% would produce $75,000.
Consisting of some capital gain and dividends, the taxation would be more favourable than if it were actual earned income and would give the beneficiary a larger net amount than $45,000. This extra amount could be added, each year, to the initial investment of $1,500,000 and could help compensate for the effects of inflation.
In my next dialogue I will cover the different types of insurance policies that are available along with insurance for specific needs, such as university for the children, the mortgage outstanding on your home, and rental property that you might own, such as a triplex.