12 steps to financial independence

[CanadianCapitalist]

In fact, the cheaper the insurance, the more skeptical I would be. They have to make money from somewhere. I have never dealt with a life insurance company before, so I might be over thinking this, but I don't really want my family to jump through hoops for money that is rightfully theirs.

The reason term life insurance is cheap for young(er) people is quite simple: the odds of dying are very small. Sure, the insurance company is probably making a profit on the underwriting alone (and in addition gets to use the float for free) but that's the wrong way to think about it. Insurance should cover risks that you may be unable to bear. And the loss of a parent for a young family would be financially devastating.

The same goes for fire insurance. The premiums are relatively cheap precisely because the odds of a fire are small.

[ethos1]

on insurance, there have been interesting comments & since I am closer to 65 than most posting who are discussing life & death insurance, I view it this way

>Single - probably need none
>Married & no kids - probably need none
>Married with kids - yes of course as income replacement to get the survivor spouse through the tough stretches
> Divorced with kids - yes, continue to have life insurance
> Married empty nesters - of course, continue to have some insurance just in case one of you pops off while still in the working age group
> Married & close to the age 65 retirement - need very little to none
> Widowed (one of you has gone) - then there is no need to continue to have any, unless you can afford to pay term and want to leave something to someone

At 62 both my wife & I have personal term life $250k & $500k respectively. The total cost is about $1500/yr. The current 5-year renewal rate and term expires when we reach 65, when we shall not renew.

Should we cancel it now, or wait till 65?

[johnsazzr]

We didn't have any life insurance other than being offered through work before we had kids. After the kids were born, life insurance is a must. Like other posters pointed out, term life is extremely cheap and a no-brainer in my opinion.

Absolutely..having lost my first wife 10 yrs ago with an 18mth old and 3 yr old...it is now the FIRST item I check off the list for families with kids..its so cheap..

[George]

Why would having a life insurance improve the odds of "staying alive"? If anything, I would think it would make a lot of people wishing you to die. Lawyers, financial advisors, funeral homes, the sharks will start to circle once they smell money, especially if you are worth more dead than alive.

I think you missed my point. Many people avoid buying life insurance because if forces them to think about their own death, which isn't a pleasant subject. The reality is that your chances of dying aren't any higher (or lower) if you have a life insurance policy.

I am also not sure whether having insurance would make the financial events any less painful.

If you suddenly died and your spouse was left in the position of having to care for your children, earn a living, and pay off your mortgage, they'll probably have an extremely hard time to do so.

Your need for insurance varies greatly with your life situation - if you have kids and jointly-held debts (i.e. a mortgage), then you NEED insurance. If you don't have kids, or they're grown up, or you have a huge wad of cash in the bank (hundreds of thousands), then insurance isn't needed.

I have never dealt with a life insurance company before, so I might be over thinking this, but I don't really want my family to jump through hoops for money that is rightfully theirs. My experience has been that when people want money from you, they would be all nice and smile. And when you exercise your rights bought with the money (like getting a refund, or ask for warranty), they would suddenly become rude, making excuses and would not return your calls. I'd rather my family go home, open my bank account and find out I stashed $8000 (10 years worth of premium) in there to last them 6 months.

Insurance companies are generally pretty easy to deal with when they know you're making a claim for a life insurance payout. All your spouse should have to do is submit a death certificate to receive the cash.

Bear in mind that $8000 is about enough to pay for your funeral and burial costs, nothing more. It won't replace your paycheque, and it won't pay off any of your debts.

As for social network, they better be there. I paid a lot of tax money for them. It's not going to be a comfortable ride for sure, but I'd expect the basics are there. Like student loans, help for single mother, etc... As I said, I might lose my job or become disabled, life insurance does not protect against those. Me dying suddenly is the least of my concerns.

I'm not sure what kind of social supports you think are out there, but "help for single mother" doesn't amount to very much - try asking a few single mothers what kind of help they get from the government and you'll have an idea (it isn't much).

Life insurance isn't meant to protect against job loss or disability, but it is meant to replace your income.

Sudden death isn't common for young people, but it does happen - illnesses can unexpectedly strike young people, and there's always the possibility of dying in an accident, especially if you do a lot of driving.

I stand by my original point - the cost of a few hundred thousand dollars in basic term life insurance shouldn't cost more than your CELL PHONE BILL. Think of it as a gift to your survivors, in the unlikely event of your death.

[MoneyEnergy]

As for buying a house vs. renting on the road to findependence, I'm finding myself starting to pay more attention to arguments about why renting can be more advantageous.

In the video "Crash Course" which I watched just last night (YouTube Chris Martenson, CrashCourse - but see his website first), they raise the example of rising home equity vis a vis inflation.

Basically, home values rise at least in tandem with inflation (due to the materials costs of building homes, etc.) - of course they certainly can rise *more* than inflation too (as happened in the last bubble). But the example brought up was that if your $250,000 home appreciates to $500,000 and you decide to sell it in order to get that equity, for example, you still have to buy another house (NB: unless you decide to rent, of course....).

And if you buy another house, all the other home prices will also have largely gone up by that point for the same general reasons that yours did, so you might be stuck buying another house of around the same new value of $500,000 (using easy numbers here; obviously you could probably find one at $450,000 etc.).

So insofar as home equities rise with inflation in this sense, it's somewhat of an illusion to think it's really easy to walk away with "new money" - or at least, very much of it. If you fully pay off your house, great - but all that equity isn't necessarily available - .... it's a bit better if you stay in the same house, perhaps.

I think it's probably best to use a fully paid-off house and rent out a room. That, to me, is the most solid benefit of home owning from my understanding at this point. I certainly plan to do that in the future.

[canabiz]

MoneyEnergy: I have reservations about renting out a room in my principal residence. We actually thought about it and did some due diligence and to us: the negatives outweigh the benefits.

I don't know your personal situation so I won't generalize anything but we don't feel comfortable having a stranger in our house, no matter how spotless the credit checks or the criminal records are. If you have kids, that is another issue altogether. You can rent rooms to acquaintances or family members but I always try to keep the 2 separate i.e. finance and relatives.

It's different if we have a rental property but if things go sour between us and the tenant, for whatever reasons, the last thing I want to happen is for him/her to be in the right place at the wrong time, if you know what I mean.

But your mileage may vary, i have seen folks renting out rooms, especially to international students who *should* be on their best terms, seeing they have invested a good chunk of coins to come here and study, and they have developed good relationships while generating healthy cash flows at the same time.

Best of luck in whatever you decide to do!

[MoneyGal]

Actually, buying life insurance may *reduce* your chance of death. This is a phenomenon known in medical science as the "healthy user bias."

In short, this bias is: people who regularly do things that are good for them (or are prescribed to them, if you can think about the many expert recommendations for adequate life insurance as like a "prescription" for life insurance) experience a reduced risk of dying from all causes, even in accidents.

Here's a link to a long article on the medical science.

[steve41]

What this indicates is that if you decide to take out life insurance thinking it will increase your life expectancy, you probably won't increase your life expectancy, however people who are inclined to carry life insurance as a general rule, will.

i.e. the latter individual is inclined to a healthier, less risky, lifestyle.. diet, non-smoking, exercise.. etc.

[MoneyGal]

Yeppers; exactly.

[the new guy]

In the link to 12 tips for financial independence, it mentions that "a typical person achieves financial independence after saving and investing a minimum of 24 years (as defined by alternate income sources exceeding primary salary source).

Questions:
i) Does financial independence = retirement readiness? if so,
ii) Does this imply that the litmust test for retirement readiness is this vs. achieving the present value of a sum that can fund the future value cash flow streams required throughout retirement?

A couple of bloggers have attempted to boil down the essential steps the protagonists took in my novel, Findependence Day: notably Larry MacDonald at Canadian Business here:

http://blog.canadianbusiness.com/roa...-independence/

and here:

http://blog.canadianbusiness.com/12-...-independence/

To clarify, I did my own version of the "skeleton" of the novel and came up with 12 sequential steps, which I described at a talk at the Financial Forum in January.

Jeff Wareham's Beyond Funds blog reproduced the 12 steps to financial independence here:

http://beyondfunds.blogspot.com/2009...ce-day-by.html