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Should You Buy More Life Insurance in a Down Economy?

Written by Aaron Pinkston, Wed, Feb 17 2010

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Over on Five Cent Nickel, there has been a discussion about life insurance – where to get it, what type, how much – that type of thing. It’s all in the comments section, you might want to check it out.

In the comments, some people point out you should have life insurance equal to ‘8 to 10 times income.’ This may work well for some, but it might not be enough (or too much) for you.

Rules-of-thumb are interesting to me. But because life insurance deals with our personal needs, rules-of-thumb don’t always work. The ‘8-10 times income’ rule could be out of line with the reason you need life insurance to begin with. You might need to make adjustments to your plan as the economy changes. Let’s take a closer look.

How much life insurance should you have?

In case you missed my super-easy post on how much life insurance you need, just click through. The method I use is very similar, if not the exact same, as some big-shot financial talents. I’m not saying I have it all figured out, but many experts agree with me.

The cool thing about this formula is that it takes into consideration your beneficiary’s expected interest rate on the money they get to handle. Or assuming x% return, you will be able to replace the income of the deceased.

Investing life insurance benefit

This isn’t an investment website, we talk about all dimensions of life insurance instead. But the two fields intersect here. If you talk with a fee-only financial adviser or any investment specialist, they will tell you your expected return depends on things like your risk tolerance, your time horizon, and how certain you want to be of not running out of money. Those things seem pretty important.

There also appear to be cyclical expectations of invested life insurance proceeds. In the mid-nineties, 10% might not have been too difficult to find, and even if you had to draw money for a long time, some advisers may have made projections along those lines. Now, clearly, people feel differently. It’s not that most investors feel differently about investing today, many feel differently about investing in the future too.

While I would love to tell you to run out and double your life insurance in a bad economy, I won’t. I will, however, encourage you to keep your entire plan in sync with all the different pieces and with your true expectations.

If your beneficiary has become a more conservative investor recently, it may be time to re-examine your plan. How will you know if your beneficiary feels differently about managing money when you’re gone? Ask. Talk about it and figure out what to do.

After talking, if you want to get customized life insurance quotes from multiple agents without worrying about the hassle, we’ll be here for you.