Couple’s ‘Baby Steps’ on Insurance May Be Taking Them in Wrong Direction
Q In the past, articles such as “financial make-overs” have provided more comic relief than advice, because my husband and I until recently were pretty much impoverished. However, we now both have state jobs that provide some benefits, and our income, while not huge, is reliable and better than in the past. We have two kids in high school whom we hope to send at least to junior college.
After looking into life insurance--I am in my mid-40s, my husband is 10 years older--we decided we are too late to get into the permanent life insurance game for ourselves, but that we may try to start inexpensive term policies on our children so that they can start early enough to not repeat our mistake. We pay $40 a month for mortgage insurance so we won’t leave them without a home in case of accidental death.
These are our baby steps! But are they the right ones? It can be hard to relate to some of the higher income advice when our discretionary budget is still pretty tight. Could we be using these small (but significant to us) expenditures in a better way?
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A Yes. To do that, you need to stay away from insurance agents--at least the one who’s been visiting you lately.
Mortgage insurance and life insurance for children rarely make sense. Mortgage insurance is typically more expensive and offers less coverage than comparable term life insurance. As for the kiddies, your agent probably dazzled you with creative projections showing you how rich your offspring could be if you started buying life insurance for them now. But she or he was probably talking about some form of cash-value insurance--”permanent” insurance in your words--that has an investment component that could be borrowed against in future years. Term life insurance would only pay off if your children died, and that would hardly be helping them get ahead.
Given your limited resources, you should be concentrating on securing your own future and retirement, not laying up riches for your kids. You are starting fairly late, so you probably need to start saving aggressively in any available retirement plan. Your state jobs may provide some pension benefit, but it could be limited by the relatively short time you’ve been employed there.
Because your children are still dependents and the mortgage isn’t paid off, you probably also need term insurance for yourself and your husband. First check to see how much is offered through your jobs, and then use the life insurance work sheet at https://www.latimes.com/insure101. Once you’ve figured out how much you need, you can shop around for a policy that fits.
If it comes down to a trade-off between retirement and life insurance, remember that you are much more likely to reach 65 than you are to die before then; it’s even less likely that both of you would die at the same time. Make your plans accordingly.
Funds for a Growing Investor
Q I’m 10 years old and am interested in putting some of my savings (about $5,000) in a mutual fund. I’m a little concerned about losing money but understand that I’m generally better off in the long run invested in some type of a stock fund. Any suggestions on which type of funds to look into?
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A Oh, child of my heart! What a delightful future lies ahead for you. If you earn an average annual return of 10% on that money, you could have nearly $600,000 by the time you’re 60. (Not that you can even imagine being that old, but still.)
To get that kind of return, though, you need to take some risk. And risk means that your investment could go down in value as well as up. Over the long run, investing in stocks and stock mutual funds has given people the best returns. You should be prepared to leave the money alone for at least five years, and try not to worry too much about what’s happening to its value in the meantime.
If you want to ease into investing, try what’s called a balanced fund. A balanced fund invests in both stocks and bonds. The stocks can give you the potential for good returns when the stock market is doing well, and the bonds can give you some protection against loss when the stock market isn’t doing so well. T. Rowe Price Balanced Fund could be a good one to try.
If you can handle more risk, look for a stock index fund. These funds invest in the stocks that make up an index such as the Standard & Poor’s 500. Vanguard Index 500 is one such fund, and Schwab 1,000 invests in a list of 1,000 mostly large-company stocks.
Good luck, and happy investing!
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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
