Zina KumokIt doesn’t get much more adult than buying life insurance. Coming to terms with your own death is a rite of passage as we grow older, and purchasing a life insurance policy is a sign that you care about what happens to your family after you’re gone.
But sometimes, it’s also a waste of money.
Accepting the reality of your own mortality and looking to protect your loved ones after you die is noble, but the funds you would spend paying for a policy can often be put to better use.
Life insurance has a very specific function, financially, and it often just doesn’t make sense to pay for it if you’re not at a certain stage in life. Imagine paying for car insurance when you haven’t even gotten your license – that’s the kind of situation many people put themselves into.
If you’re wondering whether or not it’s financially sound for you to purchase a life insurance policy, read ahead for more information.
When you don’t have kids or a mortgage.
I called my insurance agent the week after my husband and I got married and asked him if we needed to buy life insurance. He only asked me two questions: did we own any property together and did we have any kids? The answer to both questions was no, so he suggested we hold off.
Yes, if either one of us dies, the surviving party would have to change his or her lifestyle to compensate living on one income. Rent would be a bigger struggle, but neither of us would have to think about how to support a child or how to carry a mortgage by ourselves. Some days it seems odd that I don’t have life insurance even though I’m married, but I know it makes more sense to keep it this way.
However, we’re preparing to purchase life insurance next year once we buy a house. Getting out of a mortgage can take a while depending on the housing market, so it’s more necessary for a childless couple with a mortgage to buy life insurance than a couple that’s renting. If your partner dies while renting, it’s pretty easy to get out of the lease and move to a more affordable spot.
When you buy it for your kids.
During a staff meeting at my last job, someone brought up the idea of buying life insurance for your kids. I was confused. “Isn’t the whole point of life insurance to replace someone’s income?” I asked. But they disagreed.
Most of the parents in the room said they had bought life insurance for their children, in case something happened. But buying life insurance for your children, who don’t provide any financial value, is a waste of money.
Think about it: life insurance should prevent a family from having money problems if one of the earners dies. Since children don’t bring in any money (unless your kid is a famous child actor), your income would stay the same in the event of their passing – and your expenses would decrease. It’s also incredibly rare for a child to die before the parent, especially in their youth, so the odds of actually benefiting from a policy are extremely low.
Instead, you’re better off saving any money you’d pay for life insurance in an emergency fund, which will cover any potential funeral expenses. You can also put that money towards a college fund.
When you’re buying whole life insurance.
Most financial experts, including the legendary Dave Ramsey, tell people to buy term life insurance instead of whole. Whole insurance bills itself as a life insurance policy combined with a savings account. They claim that a user can build up cash value in his or her policy that the family can redeem once they pass away.
Because a whole life policy is designed to cover the customer for their entire life, it’s much more expensive than a term life policy. For example, when I input my information into a life insurance form, it tells me I qualify for a $25/month term life policy with a $500,000 payout. A whole life policy with the same benefit would cost $408.45 /month.
If you invest the $383 difference every month in an index fund earning 7% annually, you’ll have $1,011,550.80 in 40 years, or more than double the cash value of the whole life policy. Plus, you’ll have access to those funds any time – no waiting for an insurance company to pay out.
When you’re retired.
A few years ago, a friend of mine lost her father. As we were commiserating about the situation, she mentioned that his insurance policy had lapsed only within the last year. She remarked on what a shame it was that her mother wouldn’t be able to get any life insurance money.
Most retirees don’t need life insurance, especially if they don’t have a mortgage. Remember, the point of insurance is to substitute lost wages or pay for current bills. Since a retiree usually has few expenses, it’s not necessary for them to have a life insurance policy.
Have you purchased life insurance yet? What factors did you consider before taking that step? Let us know in the #Adulting Facebook community.
Like what you’ve read?
Wow! What utter rubbish! My husband died 2 weeks ago aged 43 of a massive heart attack. No illness or warning. We have no mortgage, no debt but 2 children aged 10 and 13. Life insurance is a must! No matter what your age. Funerals are unbelievably expensive, there is no way I can face word, there’s food to buy, school uniforms and bills to pay.
Life insurance is not a must – it depends on your situation. The article stated that pretty clearly.
I always thought that having permanent life insurance would allow me to spend more money during retirement, so that I could leave the death benefit to my wife and kids. Wife is 5 years younger then me and since she is going to live longer than me at my age so 8 yr longer plus the 5 years. Why should I have to spend less during retirement? I was sold on the idea that I could take my full pension and replace that income with the insurance. We would have more to use during our joint life with the differance. My insurance has been long paid up and though I could take money out if we needed it we have just left it to grow with no risk of the market. at 78 years old and looking back had I taken your advice we would have made a poor choice. We also bought it to lock in my insurability unlike car insurance I was told by our agent we are all one emergency visit away from being highly rated or declined from coverage.
I’m a little perplexed. Any comments appreciated. I have term life for about 6 months but feel it’s a waste of money. Want to cancel this month. Perfect health. I’m single with newly refi. No small children. But whole life is so expensive at 50. Not retired. I would like to have something to pay off house just in case for my daughter. Been reading too much and don’t know of a company to choose. Thinking about just saving for any funeral expenses and canceling this term. Thank you for comments
The author is naive and unsophisticated with respect to these matters. (e.g. totally ignoring taxes) If we want to be simplistic in the approach as was done here we can also say Term life is a waste of money unless you die.
I’ve had a UVLI policy for nearly 20 years. Haven’t made a premium payment in at least 5 years. The term premium is subtracted from the account. Market gains which are fully sheltered account for substantial cash value in the account and I have good access to the dollars if I need it.
I’m retiring but I have a younger wife and son. They’ll be able to keep everything should I pass rather than destroy their lives unexpectedly..
Is UVLI short for Universal Life? Also, in order to not make a premium payment for the last 5 years did you have to pay a lump-sum payment to get the policy started? Where is the policy through?
If your only concern is to pay off the mortgage then term is fine. However there are more expenses when we pass, funeral/burial, wrapping up the estate. Who is going to pay the taxes, maintenance, repairs to get it into sellable condition. What if you need to go to a nursing home before you die?
I purchased a Flexible Life policy at age 19 as the agent told me the premium would be low (it was $50/mo) and would be paid off at 30. I could continue to pay past age 30 (which I have) to increase the cash value, if I wanted to use it at retirement. I’m now 50 and the agent just notified me that my policy will terminate at age 76 due to “insufficient premium outlay”. Fortunately I have no kids and no mortgage. It sounds like I need to put aside a fund for funeral expenses in case I make it past 76!
Hi Cyd. I would not cancel term life. Definitely keep a term policy that would cover the mortgage and maybe a little extra for things like home repairs for your daughter. My husband and me have a whole life policy on him that we started at his age of 55. It is $350/month for $200,000. We thought it would be a safe way to compel us to save, while at the same time covering me for the mortgage/house repairs, if something happened to him. Unfortunately, we have $3800 less in that account, then if we had stashed $350/month in cash. We never drew on it. The policy issuer’s fees are much greater than we believed they would be. Now, he is 60 and we are going to look for a term policy, with same coverage amount, and cash out that whole life policy. The difference between the two, we will save in an interest bearing account. As far as which company, check out insure.com to find best rates.
I don’t think of term life as a waste of money. My dad passed suddenly at age 62. I was 24 and if he had had a policy for me, it would have helped greatly.
Just my two cents. 🙂
I’m 63, got life insurance at 62 just under the wire.
Only did it because of a loan I received from my sister. She requested it.
The loan is for a year. I think it’s a waste but no
Choice at the moment.
I am going to cancel as soon as loan is paid in spring. Plan to get mortgage insurance so the house is paid off. Also put money away for cremation. They can sell the house and figure it out.
This article is both dangerous and irresponsible. As. “Financial expert” the author should be ashamed of herself. Overly simplifying an extremely complex product which requires a true expert to understand and recommend.
What part was rubbish?
Additionally ann, the article says IF YOU HAVE KIDS IT IS WORTH IT. smh learn to read before you jump to conclusions
I actually really like most of what the authors says. You’re forgetting they ARE recommending life insurance for spouses that have a mortgage and/or children so they’d agree that you actually had one. Sorry about your loss.
Hi Cyd!
Just came in and saw this comment – was wondering if you ever received information on this?
Everything in this article is SPOT ON. Life insurance should only be purchased for replacement of income…. otherwise you are just throwing money out the window. Cyd, If you want to leave a paid off home to your daughter just take out a term insurance policy that would be enough to cover your funeral expenses and pay off the house. Your daughter would be set. Term insurance is cheap as can be. While life or any type of policy that combines insurance and investment is an absolute ripoff. That is where insurance agents make all of their money and they make money off of you every year you have that horrible policy.
I understand your reasoning for not getting life insurance for your children, but the purpose of getting it isn’t to replace income. First, Whole Life policies generate compounded interest on the cash value it accumulates, so setting up a policy when your child is two years old will allow them to take out the cash value if they need it(which is the money you’ve put in plus a nice profit from the interest). Second, whole life policies are expensive, and the younger you are the lower your premiums will be. So your child can keep it for life if they wanted, or cash it out when they’re a lot older for a very lucrative profit.
I feel that some life insurance is nice for surviving members of your family that may become unable to work for the time leading up to and after your death. Calculate this in as part of the thought process. Grief is something that can cause a major financial hardship for loved ones that even covering funeral costs won’t help. I wish my parents would’ve considered that. I certainly will for my own children.
This article is totally confusing and distracting and without any logical reasoning:
1) Is it saying, both term and whole life insurance policies are waste of money, or only whole one?
2) Is it saying, apart from paying mortgage and raising kids, the deceased should not have any finacial obligations?
3) Is it saying, the insured could live the entire period of index funds payout term to reap the maturity benefits?
4) Is it saying, retired ones should not have financial expectations?
You are right Ann. The author seems to have written this after a day dream!!
Awesome. There is always a good use for life insurance policy particularly for a person of responsibilities who cares. You have made the right decision.
Yes it is not a must. It is a decision for the wise.