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.
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.
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.