Is Life Insurance worth it, or a waste of your hard-earned money?
When I was a young invincible lad, I actually worked for a brief period selling life insurance. At the time I thought it was a rip off. High premiums, hard to answer the question “what’s the best type”, and the nearly impossible question to answer, “how much life insurance do I need”?
Here’s the deal. I’m going to break it down in a clean simple table. At the end of the day, life insurance IS NOT FOR YOUR BENEFIT. It’s to benefit the people you leave behind, by preventing their financial ruin due to your untimely demise.
Let’s start first with whether you have people that depend on you financially. When you’re first starting out, you probably don’t have dependents, and probably have negative net worth (let’s face it, student loans ain’t cheap). Worry about keeping that roof over your head and keeping yourself fed.
What if you don’t have dependents but are a high earner or have positive net worth? This is my personal view. If leaving a legacy is important to you, and you’ve got someone or an organization in mind to be the beneficiary, go ahead. Choose the amount that makes sense and for something important to you.
Now here’s where life insurance in my humble opinion, matters the absolute most. When you have dependents that rely on your income. Life insurance costs money, so it’s important to balance out how much you need for them to maintain a similar lifestyle. If your income is on the lower end, keeping your family fed, clothed, housed, all takes priority. That’s the here and now. Life insurance covers the “maybe” since it has an expiration date. Cover your immediate needs first. If there’s enough left over at the end of the day, get some insurance to keep them financially protected.
When you’re a high earner but have negative net worth, frankly you need a lot of insurance to have your dependents maintain that lifestyle. Debt collectors will come knocking, make sure the insurance can cover those debts. On the flip side, if you’re a very high earner with positive net worth, your family is likely less dependent on a paycheck and more dependent on income assets (bonds, dividend paying stocks) that would be willed to them anyway. Insurance just wouldn’t be needed to keep your dependents living the same lifestyle.
How Much Life Insurance Do I Need
So what’s the right amount? That’s subjective, but let me give some items to consider:
- How much debt do you and your dependents carry (think mortgage balance here)
- What would the monthly expenses be after wiping out debt balances
- How long can you afford to replace that income, 5 years, 10 years
- Are there any major upcoming expenses you would want to cover (college tuition for your kids)
There’s no right answer here. Balance is key. Can you afford to cover all the above costs, if so, do it, but the premiums can really add up. Have a discussion with your spouse. It’s for their benefit anyway!
Term Life or Whole Life Insurance
First, term life is just what it sounds like. You pay a premium for a period of time, say 15 years, and if you pass away during that time, the insurance company pays your beneficiaries. The annual premium might go up year after year unless you have what’s called “level” or guaranteed flat premiums so keep an eye out.
Whole life insurance is something long-term and could be with you your whole life if you choose to pay the higher premiums as you get older. There’s a feature where you accrue a cash balance and can borrow against if you ever needed to. Sounds pretty good right?
I’ll give you my real opinion on this. Remember that table that showed when it makes the most sense to have life insurance? Chances are, when you probably don’t need life insurance, you’re young and healthy. Low risk and probably not high on your priority list with a limited budget. When you’re older and retired, yes you’re at a higher risk, but you’re also either on a limited budget when annual premiums are at their highest, or you were able to save enough in a retirement account or other investments to live off of and pass to your loved ones. In either of those situations, life insurance isn’t on your mind.
Whole life insurance tries to be too many things at once, and there are simply better options out there. Having this cash balance that you can borrow against is like a hook that keeps people renewing their policy even when those premiums grow. But the “investment” growth will be low, much like investing in a bond or blue chip dividend stock, again, that fits only during a certain part of your life… when you’re younger you typically want high growth/ higher risk investments. Plus, that money doesn’t come from thin air, the insurance company is just doing it for you. Part of your premium goes toward the policy, part gets invested. Why can’t you simply do that in a retirement account where you still get the tax benefit, and you have significantly more options, plus you get to enjoy it while you’re living! Bottom line, if you ask me, stick with term life insurance if you’re considering getting a policy.
