When opening the life insurance subject, sometimes people get a negative reaction. Maybe that comes from the fact that it is not a subject that we like to talk about in the first place.
I’d like to share a story that is important to me because the client became a great friend of mine and I’ve met him and his wife on a soccer field, coaching his son how to play soccer. I was telling him, Cedric, that I would like to sit down with them talking about the different strategies to build a financial plan. They were open to see me so I sat down at their kitchen table and when I got to the life insurance part, they were looking at me strangely saying that everything was okay! Hopefully, I was convincing enough to take a look at their policies and to give them a little education regarding what they had in their hands for their family’s protection.
Cedric and Tammy (35 and 39 years old non-smokers)
Basically, here is their financial portrait:
Cedric is making 42,000$ per year, while Tammy is not working. She is the one getting everything covered at home with their 3 children.
They own a home worth 180,000$ with a mortgage of 145,000$. They pay 924$ a month to service this debt. They have a car loan of 11,500$ and a consolidated debt of 7,500$. They pay 585$/month between those 2 payments.
Regarding their life insurance policies, Cedric had a 50,000$ whole life policy paying 76$/ month and Tammy had the same 50,000$ for 56$/month. On the mortgage, they had a mortgage life insurance paying 70$/month.
To summarize it up, Cedric had 190,000$ and Tammy 190,000$ for 202$ each month.
The first point to notice here is that even though Cedric was the only breadwinner of the family, both of them had the same coverage!
The second thing to point out is the fact that if Cedric were to die, Tammy would have a house paid for with only 1 year of Cedric’s salary. This is not enough to keep the family’s quality of life.
This is how it should have looked like
By going through the necessary calculations, I found out that Cedric needed 378,000$ and Tammy 204,000$. In that case, it is important to cover the mortgage as well as the other debts. But also, we have to keep in mind that if Cedric dies, Tammy cannot go to work easily with 3 young children. So, their life insurance has to provide a monthly income for Tammy, should Cedric pass away. I put for them a monthly income replacement of 1,500$.
Now that we have found their needs (which are much more than what they previously had), how can we make sure that it doesn’t cost too much for their budget. Because what really happened is that when Cedric saw his life insurance need he told me that he is already paying 202$ for 190,000$ each and he can’t afford paying more!
I told him that I already thought about that and I showed him their new life insurance plan.
So to break things down, here is what I put for the 2 of them.
Cedric 100,000$ on a 25 year term and 278,000$ on a 15 year term
Tammy 100,000$ on a 25 year term and 104,000$ on a 15 year term
Using that plan for them, I make sure that no matter what happens and when it happens, they are covered up. Next thing, I was happy to tell Tammy and Cedric that instead of paying 202$ for their policies, they would only have to spend 93,57$/ month!! So I double the protection with Cedric, increase the one on Tammy and used a 10,000$ rider for the children for less than half the cost!
They couldn’t believe it. But the greatest part of term life is that instead of using life insurance to invest their money in a low return cash value, I used a mutual fund with an average return of 7%/ year. So by cancelling their policy, they got back a 2300$ check for their cash surrender value. But also, we started a 110$/month systematic program in a tax free investment.
By doing so, at their retiring age of 65, Cedric and Tammy will have accumulated roughly 153,000$! I asked them what they prefer to have at 65: a life insurance policy of 50,000$ OR 153,000$ tax-free money? Needless to say that they told me they prefer having money in the bank, instead of still paying for their life insurance policies at 65!
At the end of the appointment, now that we have completed the paperwork, I asked them how do they feel now about life insurance. Tammy told me that she is now more comfortable with the concept:)