Life insurance is a very controversial topic. You frequently hear arguments of term vs. whole vs. universal vs. indexed universal guaranteed, etc. Honestly, you only need term, but that’s a conversation for another day (actually, we touched on it a few months ago!) Today, we’ll talk about who needs insurance and how much might be beneficial.
Who needs life insurance and why
Life insurance gets over-complicated by deploying really crazy policies that fail to do the simplest thing well: protect the people that depend upon you in the event of your death. That’s right, this is the single test that can determine who needs life insurance in 99% of situations. I’ll give some examples below to hopefully clear this up.
- You have a wife
- You have kids
- You have dependent parents
- You have another dependent that relies on you for support
Yeah, crazy huh? That’s right, you don’t need life insurance if you’re a single person with no dependents other than your dog. Why would you buy it? The entire purpose is to insure the value of your life to make sure you don’t leave a dependent high and dry with no support. So if these circumstances don’t exist, why buy it?
Now, I’m sure one of our readers could come up with some crazy off the wall situation that would require a life insurance policy even though there isn’t “technically” a dependent in the scenario, but who knows.
How much insurance to buy
This is the hardest question to answer, because it varies so much on a case-by-case basis. Some people want to leave their spouse enough to pay off their home and send the kids to college, others have high-earning spouses that only want to leave burial costs. Whatever the reason is, you’ll want to think hard about it and ensure you’re not underinsured, but also not overinsured.
- Pay off the family home. This is a very common tactic people employ life insurance for. Example: you owe $400k on the mortgage, and figure the spouse can survive as long as you clear that large debt. So you take out a policy for at least $400k and hope for the best.
- Replace income. Maybe you make $100k a year and want to replace that for your spouse for 30 years. By that math, you would want a $3M policy.
- Cover burial. To me, this is the most overrated reason for life insurance. There are affordable burial options available, and this shouldn’t be the main reason you buy insurance. If you’re worried about your spouse being able to cover a $10k funeral, you may need to fix your finances.
- Pay for kids college. While this is important, it shouldn’t be first and foremost. Kids can take loans for college. Your widowed spouse cannot take loans for retirement.
- Disabled child. If you are in this position, you may need a much larger policy in order to account for someone to care for your child and manage their finances.
Again, this list isn’t all inclusive, but gives an idea of some of the factors that should be weighed when buying life insurance.
Self-insuring
While buying a life insurance is a great hedge against an untimely death, it certainly shouldn’t be relied on for 75 years. Most term policies lapse at the 30 year mark or before, so planning for 75 years would be difficult and costly.
Instead, you should save accordingly. If you continue to progress financially as you age, you’ll no longer need life insurance at some point. This would mean you are “self-insured”. Example: you took a 20 year $1M term policy at 30 years old. This policy will expire when you’re 50. At 50, you expect to have $2.5M in retirement accounts and a paid off home. You could make the argument that the $1M policy is no longer needed.
Hitting self-insured status is completely subjective. What works for one person may not work for another. You need to understand your financial picture very well in order to plan with enough confidence to do this. In order to achieve that level of success, you should keep reading Wealthy Idiots!
Closing thoughts
Term life isn’t complicated, but there are a lot of shady places to buy it. In order to get the best deal for you, I recommend checking out Term4Sale. They will take your basic info and generate a ton of quotes from highly rated companies. This allows you the opportunity to review prices without any kind of commitment. You don’t even have to enter personal information!
