You Need Life Insurance Yesterday

Perhaps it’s a bit obvious to bring this up during a pandemic, but it needs to be asked: do you have the right life insurance? Who needs life insurance? How much life insurance is enough? And where should you get it? Let’s tackle these questions today.

Who Needs Life Insurance?

The purpose of life insurance is simple: to relieve the financial burden of a death. This is especially important when it comes to providing for dependents.

The most basic life insurance covers the cost of end of life services. A simple cremation and funeral service costs several thousand, and a full burial and funeral service runs upwards of $10,000. If you’re young and single with no dependents, covering end of life expenses is all the insurance you probably need. These policies may be called “Final Expense” or “Burial and Funeral” insurance, and are inexpensive. A totally acceptable alternative to such a policy would be to have $10,000 in savings to cover these costs.

However, if you are married and/or have children, you need much more extensive life insurance. You need to not only be able to cover funeral expenses, but also to make up for lost income and/or services.

How much is enough?

A good rule of thumb is to purchase a policy for 10 times your income. So if you earn $50,000 you would want a $500,000 policy. This is paid out to the beneficiary over a set period of time, such as ten years. You can also take into consideration if your expenses are much more or less than your income.

What about stay at home parents? STAP absolutely need life insurance. Stay at home parents provide valuable services like childcare and housework. To replace replace these services would be quite expensive, easily $25 per hour or more. Consider how you’d cover the cost of childcare and household services like cooking, cleaning, and laundry. A common estimate is that it would take $25,000 – $40,000 per year to provide the services a stay at home parent provides.

What type of policy?

Equally important to the amount of insurance is the type of insurance policy. There are two main structures to life insurance policies: whole life or term. Whole life insurance covers you for life. So if you die at age 30 or age 90, you will receive the same benefits. Term life insurance covers your benefits for a certain period of time, often 15-20 years (though longer is available). While it’s tempting to get a policy that will cover you for a lifetime without the price going up, term insurance is the way to go in nearly every case. Here’s why:

Whole life insurance costs a lot more per month–often 10-12 times more. As you can imagine, insuring someone over half a century or more is going to be more expensive. So you’re really overpaying for something you aren’t likely to need for a long time. Additionally, most people don’t need life time coverage. You need coverage for as long as people will be dependent on you, and until you are self-insured (own adequate investments).

That’s why 15-20 years is a good term length. You pay less because you’re not very likely to actually need those benefits during that time period. Additionally, if you have young children, they’ll be grown and most likely independent in that time period. As your children become independent, your expenses should decrease quite a bit as well. However, if you have one or more children who may continue to need your support into adulthood, this is an even more compelling reason to have a strong life insurance policy in place.

Lastly, you can plan to become self-insured over that 15-20 term by investing in retirement accounts. If you’ve invested consistently and wisely over that time period, your accounts should be generating enough interest for a spouse or other dependent to life off of.

Whole life insurance is an investment product that salespeople will make sound very appealing, so it’s important to understand their pitfalls. Here are some drawbacks just in case whole life is still tempting you:

  1. The investment is not diversified like other investment vehicles. This means the entire investment is with a single company and you are completely trusting that company to perform well. You would never be advised to put all your retirement funds in one single company, so why would you want to do this with whole life insurance, which is sold as a retirement product as well?
  2. Whole life insurance returns are not guaranteed. Salespeople will show you optimistic projections of returns, but the guaranteed returns (if any) are actually very low. The returns on whole life policies assume a long period such as 40 years, and perform lower and are less liquid than other investment options. The fees and commissions are much higher than 401ks or IRAs and will further reduce your returns.
  3. Everything about the product is less transparent. From the fees, the sales commission, the so-called guaranteed returns, to many other misleading claims, the product is purposely not well-explained to the consumer. The confusing nature alone is enough to deter me from this financial product, especially when a better option is available. You should NEVER buy a whole life policy without first consulting a trusted fee-only financial advisor, preferably one whom is not pushing that particular policy. Commissions on these policies are 70-100% of the first year’s premium so agents are highly motivated to sell them.

Bottom line: choose term life insurance. Getting a term policy will require some paperwork and a physical. Your exact price will depend on your age and health, as well as how much coverage you are seeking and the length of your term. We use American General (but this is not an affiliate or sponsored post).

While this pandemic is truly sad and sometimes scary, it would be a silver lining if it motivated more of us to prepare for the unexpected. Sometimes it takes something big to get our attention, and now is the time to make sure our loved ones are provided for.

What motivated you to get life insurance? Any questions about the topic?

6 Responses to “You Need Life Insurance Yesterday”

  1. Connie says :

    Term insurance is wise while you are raising children or have a mortgage. I would also recommend a small whole policy that you would take out at an early age to cover final expenses. My parents had me take such a policy when I was 15 years of age. The premium is less than $30 a year. It should cover my final expenses because it purchases additional insurance. My husband had a whole life policy but we cashed it in to purchase a vehicle and ended up purchasing a variable life policy. Over time we realized that this was not a good investment and was actually losing value, so we cashed it in and purchased a $10,000 I Bond to cover his final expenses. Also many companies do provide life insurance to their employees up to the amount of their annual income. This, in essence, is also a term plan that lasts as long as the employee’s employment does.

    • Kalie says :

      That’s good that you have been well prepared and realized when your policy was not financially efficient and found a better one. While I could see young single people carrying a small final expense policy, I do not believe it is necessary in addition to term insurance, since the benefit can cover funeral costs as well as other expenses.

  2. Carrie says :

    We bought term life policies at ages 28 and 30. We had just moved into a bigger home with a bigger mortgage (we also had mortgage insurance). We bought a 20 year policy because we knew we would be covered until the children were grown. That policy expires next year. Our insurance company called trying to sell us another policy when this one expires. We declined, they tried to tell us it would pay off debt and pay final expenses. We have been very careful with financial planning. We do not have any debt and have savings and investments that would more than cover any final expenses. We consider ourselves “self-insured” now.

    • Kalie says :

      How wise that you took out appropriate insurance when you needed it for kids and a mortgage, and now that it is expiring, you are self-insured. It’s great to hear examples showing these financial principles really work in real life.

  3. Julie says :

    We did choose term insurance instead of whole life but are regretting it now. Term does go up when each term is finished and when you hit 50 watch out. But now that my husband is uninsurable, I sure wish we had the whole life. Of course you can’t predict these things and in a perfect world where nothing goes wrong, your advice is spot on but we are the exception to the rule. There was no way of knowing this however, but in hindsight, wish we had kept the whole life.

    • Kalie says :

      I’m sorry to hear that your husband is now uninsurable. The term insurance advice definitely comes with the caveat of becoming self-insured. I realize that is not always easy advice to follow, and that life can throw you curveballs that make it difficult to reach that goal. Thanks for sharing about your regrets here.

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