It 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.