Money Management

Don’t buy life insurance without reading this advice. 

Anyone thinking about finances at the beginning of a new year probably has many tasks on their to-do list. For example, paying off debt or saving more for emergencies may be possible goals.

There’s one step most people absolutely must make sure to take, though, if they haven’t already. That step is getting life insurance in place if there are any dependents such as a spouse, child, or parent relying on them.

While this may be something many people overlook since they’re probably not considering a worst-case scenario, the reality is that something can happen anytime and no one should leave their family unprotected when there are life insurance options out there.

For those who are not sure how much coverage to buy, there’s a simple way to find out. Read on to learn what it is.

This is the type of coverage needed

First and foremost, consumers need to make sure they get the right kind of life insurance. For almost everyone, that means buying term life coverage.

A term life policy stays in effect for a set term (hence the name). Usually, it’s around 10 to 30 years, although insurance buyers can pick a longer or shorter time depending on the insurer. Consumers should buy coverage for the period of time people will depend on them.

Whole life policies provide indefinite coverage as long as premiums remain paid, but are much more expensive. For most people, they’re unnecessary because people stop depending on their income at some point (like when the kids are grown and retirement has come).

Unless someone requires lifetime coverage (such as a parent who has a disabled child in need of lifelong care), the cheaper term policy is most likely the better bet.

This is the amount of coverage needed

Life insurance buyers also need to decide how much coverage to purchase. This means deciding on the size of the death benefit (the money that would be paid to beneficiaries if the policyholder dies during the term).

This can be tricky, but a simple formula makes the process easier. Basically, anyone buying life insurance coverage should consider using the DIME formula to estimate coverage needs. DIME stands for:

Debt: The death benefit should provide the money to pay off all balances owed.Income: The income the deceased would have earned for the rest of his or her life should be replaced. The death benefit should provide enough money to do that.Mortgage: The death benefit should ideally repay the entire mortgage balance if surviving family members will stay in the home or if the home will be passed down to heirs.Education: It should also provide enough money to pay for the schooling all children will need.

So to find out how much life insurance coverage to buy in a new year, simply consider these four criteria. After estimating the amount needed for each, add up the total and make sure the death benefit is around that amount.

Taking this step during the new year will help ensure loved ones can be provided for even if tragedy strikes. It’s well worth setting as a resolution to save family members from potential financial disaster.

Our picks for best life insurance companies

Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Making smart investments is important — so should you heed Stephan’s advice? 

Graham Stephan is an investor and YouTube personality who focuses on offering financial advice. Stephan recently offered some advice for people looking to make smart investments with their money.

Specifically, Stephan addressed the possibility of beating the market — and offered some strategies to help you build wealth in your brokerage account by earning generous returns. Here’s what Stephan suggested.

Stephan’s investing advice is worth reading

Stephan warned recently on Twitter that picking individual stocks is usually not going to be the best way to beat the market.

“Your chances of picking a winning stock are <0.33%,” he warned. “In an analysis of 26,000+ stocks from 1926, Prof Bessembinder found that the average stock loses money and lasts only 7 years.”

This doesn’t mean you can’t make wise investments, though, or that you are doomed to perform poorly when investing. Stephan just believes you shouldn’t buy individual stocks if you want to be a successful investor. “You don’t need to pick stocks to beat the market,” he said.

Instead of trying to buy individual stocks, he advises “passive index investing,” which means buying index funds that track the performance of financial indexes such as the S&P 500.

“Indexing works because it’s not a static portfolio – It’s a strategy,” Stephan explained. He detailed how stocks are added to the S&P 500, which includes 500 of the largest U.S. companies chosen based on liquidity, market cap, and positive earnings.

Stephan also said when you invest in an index fund tracking the S&P 500, you get the benefit of new companies being added and removed from the fund (and thus from your portfolio) quarterly without transaction costs.

Stephan also said that using tools to help you find the best time to buy into index funds can also help your investments perform better.

Should you listen to Stephan’s advice?

Stephan is exactly right that index fund investing is the best approach to maximizing the chances of earning favorable returns. As he points out, most actively-managed investment portfolios do not beat the S&P 500.

You may not want to try to time the market, though, as even the best strategies for doing so can fail. Missing even one of the top best days in the stock market can have huge long-term consequences for your portfolio, so rather than being strategic about when you buy index funds, you may be better off just using a strategy called dollar cost averaging and buying into an index fund with a set amount of money on a steady basis.

But while Stephan is correct in advising that you should invest in index funds, he may not be right when he says that, “You don’t need to pick stocks to beat the market.” The reality is, index funds aren’t usually going to outperform the market as a whole. In fact, some index funds — like an S&P 500 — are usually used as barometers to show how the market is doing.

What Stephan should have explained is that you don’t need to beat the market to get rich and you usually shouldn’t try. The S&P 500 produces average annual returns of around 10%, and if you invest in it and earn these average annual returns, you should be able to grow your portfolio substantially over time without trying to beat the market.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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