When to buy (or not buy) life insurance
- November 7, 2009
- 7 comments
- Posted in Latest Posts, Life Insurance
Buy life insurance only if you really need it. That sounds so sensible that you probably wonder why I bother saying it at all. But I see thousands of people wasting good money on policies they don’t need and will probably cancel—all because they fell into the hands of an insurance agent. Agents think that everybody needs insurance. I don’t.
Insurance exists for one, primary purpose—to protect the people who depend on your income if you die. So who needs life insurance?
–Anyone raising children..
–Anyone financially responsible for a spouse, partner, or parent
–That’s all.
People who need life insurance probably need a lot of it—say, eight to ten times income. Large policies aren’t expensive if you buy term insurance (for quotes, see websites such www.term4sale.com and www.accuquote.com).
Who doesn’t need insurance?
–Single people with no children or grown children that they’re no longer financially responsible for.
–Older people who have accumulated enough assets for their spouse to live on.
–Kids. Insuring children is a total waste of money. Buy them a savings bond instead.
Insurance agents are happy to sell you term insurance but they usually urge you to package it with some sort of cash-value policy. Cash-value policies “build savings,” the sales person croons. You can borrow against the cash tax-deferred. Also, you can keep cash-value policies for life. Term coverage gets expensive at later ages.
Term does get more expensive as you age, but at later ages you need less of it so it’s still affordable. Cash-value insurance, by contrast, is expensive even when you’re young. The premiums are so high that you might not be able to afford all the coverage your family needs. The “savings” in cash-value policies grow ve-e-e-ry slowly; in the early years, you “save” almost nothing (your premiums go to the salesperson in commissions and to the insurance company in fees). If you borrow against your cash value, the interest you owe builds up inside the policy, eating away at the death benefit. If you borrow too much, the policy will eventually collapse—leaving you with taxes to pay.
Even with these drawbacks, cash-value coverage makes sense for people who can afford it and won’t borrow against it. That would be you, if:
–You’re rich and want life insurance to pay your estate taxes.
–You’re rich and buy a policy so you can leave more money to your heirs tax free.
–You have a special-needs child who will need support for life.
–Your term insurance is coming to an end and you still need coverage–maybe because you divorced, remarried and had a second family. Look first at buying another but smaller term policy (you’re older so you need less coverage than you did before). If you’re healthy, term will be the least expensive choice. Alternatively, convert your term coverage to a smaller cash-value policy. It’s a last resort, however, not a first one.
Tags: cash-value insurance, life insurance agents, life insurance and children, term insurance
Jane: Appreciate your clear advice. Have wholr life policy for years. Premiums rising with modest cash value. What are my options and your advice?
Do you still need the insurance? If not, consider cashing in and investing the premiums somewhere else. To find out whether your cash value is earning a return competitive with bonds (which might suggest keeping it), consult the actuary for the Consumer Federation of America, James Hunt, at http://www.consumerfed.org/finance/life_insurance.asp.
Dear Mrs. Quinn:
I’d like to use this opportunity to thank you for your “Making the Most of Your Money” book. When I first came to the US in 1992, my friends gave me the book. I still have it, having read and re-read it over the years many times. I found the advice in the book invaluable, especially on insurance, investments, and budgeting.
I have heard you on NPR recently and was excited to learn that your new book is out. I ordered it and I am looking forward to it.
Sincerely,
Thank you so much!
The information you have here is terrific. We’re getting conflicting advice about life insurance and hope you can help. My husband and I have a toddler and another on the way. My husband works full time and I’m at home and drawing on our savings to supplement my husband’s income while I stay home for the next few years.
Whatever we spend on life insurance will come out of our savings so we don’t want to spend a ton. Your suggestion of 8-10 times our salaries makes sense, but what term would you recommend? We’re in our thirties so 30 years would get us to retirement (or at least to the point where there isn’t going to be much future income to replace), but someone recommended ten and then buying a smaller policy later. What do you think?
The problem with a 10 year term is that something could happen and your husband wouldn’t be insurable after 10 years. You could re-up the policy but only at a VERY high and rising price (see bottom of page 345-356 in my book). It’s cheaper to start with a 10-year term but you’re taking on risk. term insurance shouldn’t be expensive in your 30s, see Term4Sale.com.
Like another person who posted a message here, I got your book “Making the Most of Your Money” and have found it very useful over the years. I used the appendix to calculate how much life insurance I needed. I’d like to repeat this calculation and was wondering if you know of a good online calculator that you would recommend?