When to buy (or not buy) life insurance
- November 7, 2009
- 13 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?
After reading your book 15 years ago when we were expecting my son we purchased term life. We are into year 15 of a 20 year term with good health for my husband. In all honesty I had forgotten about the length of the policy until a recent purging of old files. I noticed that the conversion period was ‘to the 10th policy anniversary’ but we are in year 15. He is 50 now and was wondering if we should get another term quote to extend it and is it wise to wait until the policy is ending in five years when he is 55 or do it now? Of course at 20 years the premium bumps up immensely if we maintain it which we couldn’t do.
If your husband is insurable and you will need another policy, you have two options. 1. Shop for a new term policy and pay a higher premium than you’re paying now. 2. Wait for five years and keep paying your current premiums. At the end of the term, he might still be insurable. You could shop for a new term policy then. Option 2 is your low-cost option, but it’s a gamble. If he becomes uninsurable, you’d be stuck with renewing your current term policy which, as you say, will become unaffordable. I wrote about these issues here: http://janebryantquinn.com/2010/05/what-happens-when-your-term-life-insurance-runs-out-3-tips/
Sorry Jane: You have the permanent life insurance story wrong. I have done in the many comparisons of the buy term and invest the diffenence argument and permanent wins every time provided we are talikng about participating poilicies from highly rated mutual companies. Term is NOT less expensive. What? I subscribe to the life cycle approach to investing and when I use the cash value accumulation in whole life policies for the long haul in the bond/cash buckets of asset allocation it beats anything banks have and many bond funds as swell. That is only the pure financial aspect. Couple that with the disability protection with a waiver of premium and the asset protection in many states given our ever more litigous culture and whole life is a superior risk manaement tool and savings vechicle. Further the tax treatment and loan provisions allow growth and access to cash regardless of market conditions.
Insurance is after all for managing risk and using permanent life insurance in the cash/bond end of the asset allocation spectrum facilitates higer risk investing at the investment end. I have read countless crtics pick permanet apart but when one balances risk and return over time their argument fall short.
Different views. Be sure that you buy enough life insurance to cover your families needs if you die. If you’re rich enough to buy $1 million plus of whole life, no problems. If not, buy term. The key is sufficient coverage, not financial comparisons. And yes, invest the difference in a 401k or IRA.
I think you give great overall advice, but I have to disagree with some of your viewpoints on permanent life insurance. The reality is, most people can’t afford permanent coverage because they live well beyond their means and don’t have good savings habits in the first place. So, asking someone who’s living paycheck to paycheck (which most of America is) to set aside a few hundred dollars per month on stable, cash accumulating life insurance is generally impossible.
That’s why term is so popular. That, and because it is the more “affordable” way to secure adequate death benefit. But term insurance is PURE PROFIT to the insurance company due to the relative low rate of claims experience. This isn’t because insurance companies are “crooks”, it’s because the vast majority of term policies lapse, get converted to permanent, get replaced by new, cheaper versions or just expire. Most of the death benefits paid out to policyowners come from permanent insurance. Why? Because they are PERMANENT. The best life insurance is there the day you die, and that’s what permanent insurance is designed to do. That’s why permanent truly is the best kind, when it comes to doing what it was designed to do. I think everyone should have a mix of both term and permanent, but if you can afford permanent, then term is a waste of money.
I also disagree that parents shouldn’t buy insurance on children. If you look simply at the cost of burying someone in this country, it will end up costing SOMEONE $10-$15,000. As a father of 2, I would rather insure against that risk than play pass the cup at the funeral. It costs pennies a day to cover that risk on a child. As morbid as it sounds, it’s still smart planning, and most people can’t get past the emotional side of thinking about the unthinkable event of losing a child. Also, in the more likely event that the child lives to adulthood, gifting the policy to that child is a great way to give them a head start in life. I should know, because if it weren’t for the policy my grandfather bought for me when I was a kid and then gifted it to me upon graduating college, I wouldn’t have been able to pay off my debt and buy my first home when I did. Plus, that policy is still in force and is helping protect my wife and 2 children. Talk about leveraging your dollars!
thanks for writing but you know I disagree! I’d rather put money toward my child’s college than toward the risk that he might die young and I wouldn’t have the money to bury him or her. As for using the cash value in a child’s policy to pay for college — you don’t accumulate enough and loans against the policy, plus interest, could eventually blow the policy up.