Life & Income Insurance

Term vs. Permanent: Most People Only Need Term

Mechanism. Term life pays only if you die inside the stated term; it expires worthless, and it's pure protection. Permanent life (whole life, universal life, and their variants) pays out whenever you die and diverts part of each premium into a cash value account. It costs far more for two reasons: the payout is close to certain, and there's a bundled savings component plus sales commission riding along. (Saving here means money you didn't spend and actually invested—not a bank balance. Cash value isn't your savings either, not until the fees come out.) Meanwhile the gap life insurance covers has a natural end date: it replaces future income you haven't earned yet but your family is already counting on. Once the mortgage is gone and the kids are independent, the gap closes on its own.

Actionable. The default is buy term and invest the difference through the account priority stack from Day 8—assuming you actually invest it (see "Going Deeper"). Don't default to a 20-year term; match it to the year your last dependent becomes independent.

For calibration: a 20-year, $1M level term policy on a healthy non-smoker in their thirties typically runs in the low hundreds of dollars a year (varies enormously by age, health, state, and carrier—underwritten quotes are the only real answer). Industry surveys find, year after year, that people overestimate that price by a multiple. A fair number of people are talked out of coverage by a price they imagined.

Disability Insurance: The Most Underrated Policy You'll Own

Mechanism. If you're still accumulating, your largest asset isn't your house—it's the next few decades of earned income, your human capital. Death zeroes it out; long-term disability zeroes it out too, and adds medical and care costs on top. A long-standing Social Security Administration estimate: roughly one in four of today's 20-year-olds will experience a period of long-term disability before age 67. And the leading causes aren't accidents—they're musculoskeletal conditions, cancer, and cardiovascular disease. Accident-only policies cover none of that.

Actionable. Any disability policy comes down to four lines:

• Definition of disability: own-occupation (pays if you can't do your own job) is a far lower bar than any-occupation (pays only if you can't do any reasonable work)—and costs more.
• Replacement rate and cap: group long-term disability (LTD, the employer-provided long-term income policy) typically promises 60% of salary, but almost always with a monthly dollar cap.
• Elimination period: commonly 90 days, which your emergency fund has to bridge.
• Benefit period: ideally to retirement age. Also check for a residual (partial disability) provision—most disabilities reduce income rather than eliminating it.

An individual supplemental policy commonly runs 1%–3% of the annual income being insured, moving a lot with age, occupation class, and terms. Taxes, in one line: if your employer pays the premium with pre-tax dollars, benefits are taxable income; if you pay with after-tax dollars, benefits are generally tax-free—so compare coverage after tax.

US/China difference: individual disability-income insurance is a small market in mainland China; the same function is usually assembled from state disability benefits plus critical-illness cover and accidental-disability cover. Same framework, but replacing a monthly income stream with a lump-sum payout means you have to do a layer of cash-flow planning yourself.

Coverage Is a Gap Calculation, Not a Multiple

Mechanism. The two rules everyone repeats are "coverage ≈ 10× annual income" and DIME (Debt, Income, Mortgage, Education). Memorable—but they need calibrating. Income-anchored rules distort systematically for high earners, high marginal brackets, and equity-heavy pay: ① what has to be replaced is never pre-tax income, but the after-tax cash flow the family actually depends on, net of the insured person's own consumption—and the higher the bracket, the worse the overstatement; ② when income swings year to year (bonuses, equity vesting bunched into a few years), "which year do you multiply?" has no defensible answer; ③ multiples ignore the assets you've already built—the more you accumulate the smaller the gap, but the multiple doesn't come down with it.

Actionable. Use the gap method instead. It takes ten minutes:

Setting "years to cover." Cover until the youngest child is financially independent, or until the surviving partner can stand on their own. If the intent is to leave principal untouched and live off withdrawals, 25 × the annual gap (a 4% withdrawal assumption—Day 19 goes into it) works as an upper bound; for most households "cover N years" fits better.

One tax note: in the US, death benefits paid to a beneficiary are generally free of income tax, but if the insured owns the policy the proceeds count toward their taxable estate—thresholds and trust structures in Day 20.

Parents, Singles, Dual Earners: Completely Different Answers

Mechanism. Life insurance replaces other people's dependence on your income—not the value of your life. So the test is one step: if you were gone, whose standard of living would drop?

Actionable. Single people should check whether debt can pass to someone else: US federal student loans are generally discharged at the borrower's death, while private loans depend on the contract and whether there's a co-signer—co-signed debt is one of the few genuine reasons a single person needs life insurance. Also: beneficiary designations override your will. Update them immediately after a job change, marriage, divorce, or birth. Naming a minor child directly triggers a court guardianship process; the usual fix is naming a trust or custodial account instead (Day 20).