Life Insurance

The purpose of life insurance is to ensure that your dependents will have enough money invested to replace your earnings.

The 4% rule suggests that we can indefinitely draw 4% annually off an invested lump of money. So, if your family has $60,000 worth of annual expenses, and you have $1.5MM invested, you don't need life insurance! You're self-insured—your investments can already cover your family's expenses if you die.

If you have dependents, though, and you don't yet have enough money invested to self-insure, life insurance is really necessary. There are two kinds: term and whole.

Term life insurance lasts for a certain term (20 years is common). You'll pay a regular fee to maintain it, and after the term ends you'll no longer be covered. If you die within the term, your beneficiaries will receive the death benefit.

Whole life insurance lasts for your whole life. It doesn't expire, but the payments are usually significantly higher because the insurance company is guaranteed to eventually pay out.

I'd suggest a term policy. Every kind of insurance is ultimately about risk management, and if you're following this guide and pulling down a reasonable salary, eventually you'll be able to manage that risk yourself and self-insure. You'll just need some temporary coverage until then!

How much coverage should you get? Assuming the 4% rule, that's easy to calculate:

Note that we're talking about net investments. If you share some significant debt with your dependents (consumer debt, say, or student loans), it's a good idea to ensure that they'll be able to pay that off, too.

Employer-Provided Life Insurance

Your employer may include a life insurance policy as a perk. This is nice, but consider:

  • It won't follow you when you change jobs, and
  • Most on-the-job policies don't offer nearly as much coverage as you'll need (though you can check with HR for details).

I'd suggest that you entirely handle your own life insurance and treat any coverage that you get through work as a bonus. No survivors regret an additional payout.

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