Life Insurance, you need it!
I was baffled when I first educated myself on life insurance. I will be honest, I initially had no idea of the true purpose of life insurance. I thought that life insurance was to provide burial and afterlife expenses. I have always seen the Gerber commercials and the scam insurance infomercials marketed towards the elderly and underprivileged. I never analyzed the purpose until I read up on the topic and secured insurance on my wife and I, and for our family.
I don’t mean to offend anyone who sells insurance in this post, so if you are convinced that whole life, universal life, variable life, or anything other than 20-30 year term is appropriate, then do not continue reading; as this post isn’t going to change your mind. Nevertheless, I will explain why term insurance is the wise choice for those who may not know the difference.
Term insurance is the lowest premium among all life insurance products. It costs around $40 per month for a $1,000,000 policy over 20 years. That’s one 3rd of the average person’s cable bill or the total of a couple of pizza deliveries per month.
I currently have a policy that will pay my spouse and children if I pass prior to 55. That provides me with a great sense of fulfillment knowing that I have a backup plan that will change my family tree for a measly $28 bucks a month. Since I plan to be wealthy and have assets in excess of my policy’s face value when the term expires, there will no longer be a need for life insurance. In addition, I can earn better returns on my investments in no-load index funds, 401k company matches, and Roth IRA’s over the life of my policy.
The whole-life insurance myth: I personally don’t believe in whole life insurance for those with a financial plan.
My research as shown me that a $700,000 policy of whole life insurance could cost $600 to $780 per month! That is ridiculous compared to the $28 per month term life policy with $700,000 of coverage. That 20 year term policy will cost around $7,000 in total throughout the entire 20 years of protection ($28*12*20) vs. the whole life with the same payout that will cost $8,000 in the first year! Yes, the whole-life policy is likely to have built-in savings that are accessible after terms are met, but using insurance policies as a savings vehicle is an awful idea. I could also compare the $700,000 payout of term vs. a cheaper face value policy of a whole-life $100,000 policy. That policy would cost around $100 per month and would cost $24,000 over a 20 year period.
Many people who get whole-life, only get policies that range from $50k to $150k. This lower cost whole-life insurance policy doesn’t compare to the protection term-life insurance’s higher face values provide. Whole-life insurance is too expensive to justify its purpose. Why would I need to protect my family against my loss of income in my passing for my entire life? That is almost like planning to be broke in my late 50 to 60’s and not having an emergency fund, investments, retirement income, and assets later in life. Isn’t that the purpose of our working careers… to amass savings, contribute to retirement, create a legacy for our children, and retire well-off?
2. Rate of Return
Whole life insurance averages a rate of return on your money that is half of what a good no-load index mutual fund will bring in. Wouldn’t it be better to invest and actually have money, rather than using life insurance like a high-interest saving account at your local bank?
The stock market has averaged an average annual rate of return of 10% since its inception. If you purchased 20 year term for 20 bucks per month ($500k policy) and invested the other $100 bucks instead of getting $120 whole life (100k policy) you would have $87,000 in your mutual fund in 20 years while being protected with a half of million dollars worth of coverage during that span. If you had the whole-life policy and were paying $120, you would simply have $100k face value policy and maybe $15k of accessible savings.
I do not need lifetime insurance because when I am 55, I will own my home outright, and all the kids will be gone. What exactly am I insuring? I will have assets, retirement accounts, and investments to pass on. To give you an idea of how investing is a better option than paying expensive premiums assuming a realistic rate of return of 9% would be as follows:
- If a person invested $200 in a good index mutual fund for 20 years it would grow to $133,000
- If a person invested $300 in a good index mutual fund for 30 years it would grow to $549,000
- If a person invested $600 in a good index mutual fund for 30 years it would grow to 1.1 Million.
The purpose of any insurance is protection against hardship. Life insurance is protection against loss of income from a provider onto their dependent. The goal is to prevent your survivors from struggling when half of the income of the household leaves. If you earn $50k per year, the goal of your policy is to provide your survivors with that income replacement. Life insurance face values should be 10-12 times your annual salary. So if you did earn $50k, you should take out a $500k policy. There are two reasons to take out this amount of insurance. The first being that the payout would take away your mortgage. Second, if you end up at a later point during your term where the home is paid off, the funds can be invested in a no-load, low-turnover mutual fund that could earn you lets just say 7% on your money. Each year you could pull out 7% to replace your loved ones former salary and never ever tap into the principle $500,000.
The other purpose of life insurance involves who needs it. Only those who supply others with their income need life insurance, it is not wise to think of life insurance as the coverage for final service expenses. Those who have no children to care for, or are at an age range that would make coverage too expensive should not get coverage and should focus on building wealth. Building wealth is a great defense against the cost associated with passing and leaving assets to loved ones. If you are married, both you and your spouse need to have policies, even if there are no children. If your spouse passes it will be heartbreaking and stressful to not be prepared for the full costs of living expenses when you only have half the income.
I will add that children should never be insured, they have no incomes and require no life insurance. Two questions that you may have, could be “Do I need insurance if you are over 60?” or “Do I need insurance when I am single with no kids?” the answers would be no. You simply need to focus your attention on being financially responsible and working your plan. The purpose of life insurance does not apply to your needs. Your financial plan should include a 3 to 6 month of expenses, emergency fund and retirement investments that are 10% of your annual income; these accounts would cover emergencies and after-life expenses.
Additionally, don’t count on employer-provided life insurance, employers generally only coverage 1-2 times your salary (not including bonuses, commissions, etc.) and you need 10 to 12 times your salary to replace your income.
What is the need for insurance if you don’t work? If you are a stay at home spouse, you need to be insured as well, if you care for the kids while the other spouse works. You will need a nanny, housekeeper, errand runner, and tutor to be hired to replace your contributions to the family. It is difficult to place a monetary value on those services but it can easily exceed the median 1/2 household salary of 25k.
What is a $50k to $150k whole-life insurance policy payout going to do for you? It would barely touch anything after the average person addresses debt, kids college, and lifestyle needs. Your mortgage would still be there leaving you grieving and holding the checkbook with little savings. So it is my advice to take your finances serious and build a financial plan that includes term life insurance if you have others who depend on your income.
In conclusion, 10-30 term-life insurance is a vastly misunderstood tool that is extremely useful and inexpensive. If you have family or loved ones who rely on your income to survive then you need to have insurance in place immediately. Having a policy is essential to a sound financial plan. If you don’t have insurance in place and have children, you need a policy yesterday!
Here is a great place to purchase very inexpensive insurance, the health checkup will even come to your home. I am not affiliated with any of the recommendations that I offer, they are simply products and services that I use. Zander insurance is actually an insurance broker that will get you the cheapest possible coverage and the whole process can be done at home.