The Story Of Life Insurance

“Family is the most important thing in the world.” – Princess Diana

Sheri is a 43 year old teacher working at an inner-city school earning $39,000/year living in Dallas, Tx. She has a husband, Alex, who works as a roofing salesman earning $57,000/year. Their daughter Shanice (10) says she wants to be a doctor some day, and Alisandra (15) says her favorite class is history and she is hoping to get into education like her mom. They live in a lovely suburban community not far from Alex’s parents and dream about vacations at the beach and, some day, hoping to retire.

Sheri and Alex worked hard and saved money as best they could, including having saved a total of $55,000 between both of their 401K retirement accounts. Alex as definitely the man of the house and enjoyed talking about how well that money would grow and they would all live happily ever after. Sheri, while loving her husband dearly, wasn’t so certain so she decided to put together a few different scenarios which she called, ‘Best, Good, Fair’.

Best scenario: Happily Ever After

Sheri did an online search and found a compound interest calculator and roughly figured if they continued putting away $400/month into their 401Ks and assuming they earned 8% average interest they could expect, at best, around $575,000 saved up by the time they retire. She also figured they would need to draw out about $65,000/year for taxes and living expenses. Assuming they had no change in their health and no major issues occurred they could survive for up to about age 80 considering they would continue accruing interest on the money still in their accounts, and they would get social security. What if they live longer than that though? Their money will be completely depleted at this point and they can’t hardly live on social security alone. Also, what happens when she takes into account medical issues? Home and auto repairs? Financial assistance to their kids?

Good Scenario: A few bumps in the road

Sheri re-worked her calculations and this time she simply decreased the amount of money they were putting into their investments by half, so $200/month. Now the total amount at age 65 would be around $435,000. Gosh, she thought, They would be lucky to make it to age 75 with that and again she worried what would life be like if they outlived that retirement? Also, what if she or Alex passed away before then? After all they weren’t in the best of health, Alex’s father died of a heart attack at age 59 and her Mom had already been through Cancer and was lucky to be in remission with diabetes at age 63. Sheri ran a third scenario:

Fair Scenario: Life isn’t always fair

If either one of them passed away Sheri knew they would have to close out their retirement accounts in order to pay off the house, and would still have to refinance the remaining mortgage to afford to live there. At that point they wouldn’t be able to save for retirement and any major health issues would mean their children would have to work to support Alex or Sheri while grieving the loss of the other parent. She took a deep sigh. Wait, maybe it’s not that bad.

Maybe all they need is enough money to pay off the house plus an additional sum to invest into a retirement plan so they could avoid financially burdening their children. Sheri added up the mortgage $237,000 plus an additional amount for burial $15,000 plus 10 years of income replacement ($390,000 for hers, $570,000 for his) and realized their worst scenario could actually be their best! Life insurance.

Sheri knew they were still young enough and healthy enough to qualify for term life insurance plans. She also knew they needed two different size policies (mortgage+burial+income replacement) $650,000 for her and $825,000 for him.

Even though Sheri knew they couldn’t afford permanent insurance now, they could at least qualify for two 30-year term policies and it would cost them roughly $200/month total. That’s $200/month for $1,475,000 in life insurance protection, which also means they would still be able to continue investing $200/month into their 401K. Sheri also knew term life insurance policies can be tax-free payouts and they can serve as a retirement for her children, meaning when her children are working they can start paying towards the life insurance and Sheri and Alex can then start funding more money towards their retirement once again.

Lastly, Sheri knows that her term life insurance can be converted later to permanent policies so that her children can build towards a better retirement and future.

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