Life Insurance Made Easy

Most of us know this, but for some pretty good reasons, we don’t really want to think about it. To start, someone has to die for life insurance to be of use. Also, buying a policy means putting a price on the life of someone we love. That’s all complicated, messy, emotional stuff.

So we’re stuck lying in bed thinking about this dilemma: We know we need the insurance, but it’s the last thing we want to think about. So let me get to the point here and just give one very simple way to check life insurance off you mental checklist.

My goal is to give you a “good enough” plan that you’ll actually take action on, rather than spending time in the pursuit of the “perfect” plan you will never find. We want you to sleep at night, and this good enough plan will do that.

Step 1: Take your salary and multiply it by 20. First, you have to decide how much life insurance to buy. This is where most people get stuck. You’re not going to get stuck. Just take your income and multiple it by 20. For example, let’s say your income is $50,000. Take $50,000 times 20 and you get $1 million. This is the amount of life insurance coverage you’ll buy. This goes a long way toward replacing the economic loss that will result if you’re no longer around.

Step 2: Buy a 20-year term policy for that amount. Term life insurance is the cheapest policy you can buy, and it’s not complicated. As long as you pay the premiums each year, and your insurance company stays in business, you will be insured for the full 20-year term, and your premiums will not go up. If you die during that time, the beneficiary gets the money and pays no taxes on it.

At the end of 20 years, you no longer have insurance and the insurance company keeps the premiums you paid each month. Still, term insurance is the cheapest way to replace an economic loss, which is the purpose of life insurance. It’s not an investment or savings account. It’s clean, simple insurance.

Step 3: Life Insurance? Check.

That’s it. Two steps, and you’re done.

I was curious, so I got a quote for a 35-year-old male, nonsmoker in good health. I stuck with the $50,000 a year example. I called one of the major, highly rated, life insurance companies and got a quote. For a $1 million policy, the premium would be $613 per year.

That’s about $50 a month. While that’s not nothing, I bet it’s less than you were expecting if you’ve never considered life insurance.

Look, I know there are more comprehensive, complicated ways to do this. What about adding on the amount of your mortgage or the cost of your children’s education? And what about inflation? How should your beneficiaries invest that money? What would happen if your spouse’s standard of living became more expensive?

All of these are valuable questions. But none of them matter if you don’t have a life insurance policy.

It reminds me of what John Bogle, founder of the Vanguard Group, said about his simple plan of index mutual fund investments. “There might be advice that’s better than this, but the amount of advice that’s worse is infinite.” And worst, by far, is having no policy at all.

Call it the 20-20 plan. All you have to remember is 20 and 20. Set aside 10 minutes, multiply your salary by 20 and buy a 20-year term policy in that amount. Cross this item off your list of things to do and stop losing sleep over life insurance.

This commentary originally appeared February 15 on NYTimes.com

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Carl Richards, CFP®

Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. Carl has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money."

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