Do I Even Really Need Life Insurance?
A huge number of people have never considered getting life insurance. We have never thought through the costs, the types, and the benefits of having life insurance. Many people are not ready for life insurance just yet, but have not thought through when it might be a good idea. Other people are probably not quite right for life insurance, but it is better to make an informed decision than not make one at all.
I am lucky to be friends with a handful of finance experts, financial planners, and had a chance to ask them about their life insurance experiences. Here are some thoughts from our conversations.
Do I Even Need Life Insurance?
To get started, let’s talk about the people who don’t need life insurance. Teresa Mears, a freelancer writer and publisher of Living on the Cheap put it bluntly when I asked if she had or wanted life insurance. “I’m single and childless, and I don’t see any reason to have life insurance.”
There are millions of people like Teresa who probably shouldn’t spend the money on life insurance each month. The entire purpose of life insurance is to cover the expenses of your dependents in the event of your untimely demise.
Carole Cancler of Greater Seattle on the Cheap spoke to her uncle, an accountant, about life insurance. He suggested that at a minimum you should have enough life insurance to pay off any outstanding debt and cover your funeral costs, which can often reach the $10,000 range.
My friend Todd Tresidder, a financial advisor commonly known as The Financial Mentor had great advice, which is in line with what I’ve chosen to do myself. He suggests term life insurance to keep the monthly cost low, and having a big enough policy to make sure your dependents are fine if your income stops, but reminds that “you don’t need life insurance if you have developed sufficient wealth and/or independent streams of cash flow to adequately support your dependents after your death without the life insurance.”
What Kind Should I Get?
Picking life insurance policies can be very confusing. While there are lots of inputs in your decision, the biggest question you are going to have to answer is whether you need a term life insurance policy or an investment style policy such as whole life insurance.
Scott Maderer of Focused Intensity Coaching believes that the vast majority of people should only buy term life insurance due to the lower monthly cost. Penny Pinchin Mom Tracie Richmond Fobes also opted for term life insurance. “but we opted for Term because it was less expensive for one. We also knew that by the time that it will expire we should be able to have enough money to be self-insured.”
Rebecca Stapler had thought about investment style life insurance, but decided against it.
“30-year level term policies: We bought 30-year policies with the “plan for the worst and hope for the best” mentality. Although we hope we will have enough retirement savings to replace the value of the policies before we hit the 30-year mark, we decided to hedge out bets and buy a longer term. We bought “level” payments for the stability and predictability of the same payment year after year. We didn’t want whole life policies because we see them as a poor investment. Life insurance is something we hope to never use — just like our health and auto insurance. To us, it’s not an investment vehicle.”
When is Life Insurance Absolutely Necessary?
As you can see, there are some common themes among those who have bought, and didn’t buy, life insurance.
Term life insurance is made for people who need income replacement to take care of their families and loved ones. If you don’t have anyone that relies on you for your income, there is little need for life insurance. If you are a non-earning spouse, you may consider a life insurance policy that would cover future child care costs, but nothing as dramatic as income replacement.
In my case, while I don’t have kids today, I do have a wife and will have kids in the near future. As life insurance costs only rise when you age, it is always the best deal to buy insurance while you’re young and don’t need it just yet if you think you will in the future. The savings can be huge!
Just think about it from your loved one’s perspective. If you die unexpectedly, the emotional burden on your family would be enormous. But on top of that of they have to immediately pay $10,000 for funeral expenses plus any medical bills, and that can be a pretty big shock. Fast forward a few weeks and they won’t be able to afford the mortgage payment, other bills, and their entire lives become totally off track.
My friend Jeff Rose really hit the nail on the head.
It’s absolutely important to have life insurance when you have dependents that are counting on you. After you get married and especially if you have kids is when you better be shopping for life insurance. And don’t be content in just having the $10,000 that your employer might offer you. That’s not nearly enough. Remember, life insurance is meant to replace your income in the event something happens to you, not just bury you. You want to purchase enough that it can take care of your family many years after you’ve passed.
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