Life Insurance tends to be one of those things that people really don’t want to deal with. We know we should have it, but it can frequently serve to remind us of our mortality. And let’s face it; it’s not all that exciting. Personally, I see a lot confusion regarding this matter. So how about reviewing some of the issues behind buying life insurance, with a mind towards keeping those premium costs low?
When Does It Make Sense To Buy Life Insurance
Let’s check out a few scenarios and see how applicable life insurance is in each case.
On Your Own
You are fresh out of high school, college, or a tour of the military. For the first time, you are truly on your own as a young adult. Because you’re single, you probably don’t need life insurance yet, which is generally designed to provide income for those whose financial security is tied to you, such as a spouse, child, or dependent parents. However, if you have existing debts to take care of or loved ones like nieces/nephews or parents whom you may want to help in your absence, some life insurance may be a good idea. But, at this stage you don’t really need this. That said, your premiums do increase as you age and develop health conditions, so locking in lower premiums when you are young may be beneficial.
Getting Hitched
So you’ve gotten married. Now life insurance is more important because you’ve got someone else in your life. You might be able to afford purchasing sufficient death benefits through a whole life policy, which has an investment/savings component as well as death benefits. More likely, you’ll be better off buying term life insurance, which provides only a “pure” death benefit for a death occurring within a specified time. The important thing is to insure the loss of income so the surviving spouse’s lifestyle and life situation are not in jeopardy.
Becoming Proud Parents
You’re finally facing a true life changing event! A newborn brings many changes to your household, including insurance needs. I can’t think of a better excuse to get life insurance (on yourself, not your kid — although there are exceptions). If you haven’t gotten a policy yet, you may want to consider it.
Where To Get Life Insurance
You can consider a lot of the big names out there (e.g. State Farm, AllState, etc) or you can go with what your employer offers. Alternatively, you could use an insurance broker who can help you narrow down your choices. If you are more comfortable with doing your own research online, then you may check out these “online insurance brokers” for leads and quotes:
If you already have a policy, it may be time to increase your death benefit. One of the best ways to figure out how much you need is to determine what dollar amount you would need today, should you pass now, to replace your loss of income and provide for future expense such as college for your kids. Unless, of course, you have an adequate college fund already in place such as a 529 college savings plan. There are many online calculators that can give you a rough estimate.
Children Have Flown The Coop
As your children strike out on their own, it’s time for another major review of your insurance coverage. With the kids gone, you may not need as much life insurance as before, but it remains critical if you’re married and still working. You will still need some form of income replacement should you or your spouse pass away, or you may want to consider your death benefits as part of your estate to pass on to your kids.
Image from About.com.
Reaching Retirement
Once you’ve reached your golden years, you may think of crossing off your premium payments from your list of annual expenses (and your budget!). You may need minimal or no life insurance at this stage — perhaps just enough to cover any debts you still have and to be certain that your spouse will be fine, financially. Many people at this stage are considered to be “self insured”. But some people decide to continue with life insurance to provide for their causes: charities, children, and grand children. As I mentioned earlier, life insurance is sometimes used as a way to create an immediate estate to be passed on to one’s heirs. You may want to look into setting up an irrevocable life insurance trust (ILIT). I recently heard of a man who said he was going to spend all of his assets (house and all) but use life insurance to pass to his kids. Maybe a little extreme, but I think it does have some logic to it! There are also some folks who earmark their death benefits for taking care of outstanding debts they may leave behind (or even to cover funeral costs).
So What Should You Get? Term Or Whole Life?
So, what kind of insurance should you buy? For a long answer, you may want to read our article on life and disability insurance. But here’s the quick response: from a purely financial perspective, in my opinion, term insurance is almost always going to be better than a whole life policy. Sure, whole life policies are “sold” by agents as a great way to save for retirement and get insurance at the same time. But, if you compare the two, whole life is much more expensive. Not only are your premium costs higher, but so too are the internal costs of getting those benefits. After costs, the so-called investing or savings component of a whole life policy will frequently do worse than if you take your savings by buying term instead, and independently investing that difference in stocks or mutual funds. Over a 20 year period, the costs you incur (with a whole life policy) can add up and be a real drag on your performance.
Personally, I would not recommend whole life to anyone. The conventional wisdom here is to buy a sufficient amount of term, keep your costs low and save or invest the rest. Lots of agents love whole life policies, because of the so-called savings component, but more often, it’s because they pay greater commissions. I would be leery of people pushing this idea on you. Seek an independent agent (not with just one company) and find someone that does it on a fee-only basis if you can. Or you may want to consider getting an objective, third party insurance evaluation by a fee-only financial planner (who won’t sell the insurance) before you buy. Call me cynical, but I have seen way too many people stuck in whole life policies, annuities, etc. that they did not need and only fattened the agent’s wallet.
Created January 25, 2010. Updated May 21, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.
{ 18 comments… read them below or add one }
Life insurance is so important. We have life insurance to be prepared for the unexpected!
Based on our personal calculations there will come a point well before retirement but after the kids are out of the house that we can cancel my life insurance policies.
For my wife’s policy, it will likely be canceled the day our kids head off to college.
I think life insurance is something a lot of families, especially young families, forget or do not think they need.
The life insurance is not for you, its for the people you love. Term life insurance is relatively cheap and you can usually pick up amount like $250K for around $20 per month guaranteed for 20 years.
I do not fully agree with the writer about whole life policies. While they are more expensive, they are another way to save and diversify. Also, you can borrow against the policy and not really worry about any of the capital gain issues – its like you can be your own bank.
However, at the end of the day, at least pick up some policy from a reputable company.
While the comments in the blog do bear some merit, there is much more to be considered. Term is a temporary plan, meaning that it will expire at some time, leaving the family without insurance. Insurance was never designed to make people wealthy, but to allow the remaining family members to live in the manner they have been accustomed to. By arbitrarily canceling the policy, you may leave the remaining family members in great financial difficulty. They live on the interest generated by the lump sum, not the principal. Additionally, he did not address Universal Life or Variable life. As a licensed agent, I have seen what the benefits of life insurance are and the detriments of having a lack of the same present. Canceling the insurance “the minute the kids are out of college” is shortsighted and foolhardy without looking at all the factors involved in the family finances. Consult with an experienced professional before either buying or selling your insurance.
My wife and I have term. My wife would like whole life, but I work in the insurance industry (in IT, not operations) and have managed to win the argument so far 🙂
A couple of arguments you might hear:
“Over time, you’ll pay X in premium for term and Y in whole life.” This is a flawed argument to make term seem more expensive, as it simply adds the cost of the premium for each year, with no thought given to time value of money. Think of it this way – if you can pay $10,000 for something over the course of 20 years, would you prefer to pay $500 every year, or $100 in year one, gradually increasing to $1000 in year 20? You want the second option, since the cost had a lower net present value.
“Term is not renewable past age Z”. My wife occassionally gets worried about the fact that we won’t be able to renew our insurance beyond age 80. I have to remind her that it is intended for income replacement … and that I intend to have minimal wages at age 80 🙂
Insurance is a risky buy because there is a lot of research that goes into finding the right insurer and packages… And also, some problems that I had was not knowing when to buy life insurance because as a young adult you think you don’t need it but I figured it’s best to buy sooner rather than later if you can.
When there’s competition among insurers, the consumer wins out. Regardless of the type of insurance you’re looking for, those insurance aggregators are built to supply you with choices and can assist you with finding the right policy for your family. They provide insurance leads that will compete for your business.
So much when buying insurance is about personal circumstance. If you are not an expert in the field it is important to find some one who is and who you can trust. There are many useful websites available to help you better understand insurance, like this one. However understanding insurance is not enough, you will tend to find rates more expensive when going direct to an insurer rather than through a broker, this is due to economies of scale brokers have when buying policies.
The reason why Whole Life is a better investment is because most families don’t have 50K to 100K at the drop of a bucket to put into an Annuity for retirement. With a Whole Life Insurance policy 10 to 20 years down the road you can convert that to an Annuity Policy for your retirement which will give you monthly cash payments after age 65.
You get the same commission whether it’s Whole Life or Term Coverage.
Always keep in mind the reasons for buying life insurance: Protection of the breadwinner’s income (may be from husband, from wife or both in our day and age). Why protect them? They provide the income for the children growing up. Without their income the family would have financial difficulty if something were to happen to them. Life Insurance is to protect the dependents that depend on that income UNTIL they are old enough to make income on their own (finish school and get a job).
People have the misconception that they can make someone rich from buying lots of life insurance. Life Insurance premiums get more and more expensive as you age so you may end up burning through money paying on high premiums in the future. You are better off saving the money and investing it wisely in a retirement account (never combine it with any life insurance policy = whole life / universal life / variable universal life / permanent life insurance). Only buy term life insurance and ONLY when you need it.
One reason for aging members of the Baby Boomers – sandwich generation caring for elderly parents and helping with their grandchildren to have life insurance, even though their kids are grown, is to help provide for extra needs for the elderly parents and/or grandkids or kids with special needs, in the event of the boomer passing away. If they die, paid help might be required to replace their senior home care giving or granny nanny-ing.
I have been selling life insurance for a while and because of this I have often put a lot of thought into which type of policy I would buy. As soon as I have a family to provide for I will purchase a term life insurance policy. They are pretty cheap in the UK and as many people have mentioned it should be a top priority in any parents life to provide for and protect their children if the worst should happen.
i would definitely agree on this one. i have been a sales agent for life insurance for more than 2 years, and we don’t actually push for term insurance. Looking on the savings side, people can actually get more compared to whole life insurances, but then again insurance companies are businesses, like health care and hospitals. So you can expect more.
I totally agree that we must have life insurance. We don’t know what will happen tomorrow.
The truth is, the cost of life insurance is up to you. It depends on what you can afford, and if you do some research on which insurance companies are willing to cover you for that amount. Because I believe that everyone is insurable, I think that there is a coverage for everybody, no matter what financial shape they are in.
I say lock it in young with rock bottom rates and you’re healthy..30 year Term. If you’re smart, you’ll be self insured in 30 years.
Getting Term Life on your own is also important because in most cases it is cheaper than what your employer can provide. The premium stays the same, as opposed to being age-banded through an employer.
I think you’re right: whole life is suitable is some circumstances, but most people would benefit more from term life, and typically this makes the most financial sense. To your point about re-evaluating your need for insurance at various stages of life- I think you hit the nail on the head. Often times, people don’t want to take the time to reconsider their coverage needs, but it can be highly beneficial.