When and How To Buy Life Insurance

August 19, 2021

Nobody enjoys thinking about life insurance, for the same reason no one enjoys planning their own funeral or shopping for coffins. It’s normal to not want to think about what happens after you or your spouse are no longer here. Avoiding or delaying the purchase of life insurance, though, can have an enormous cost. Life insurance offers valuable protection from unforeseen events and can help ensure your family is taken care of after you are gone. How do you know whether or not you need life insurance, what kind do you get, and how much do you need?

Who needs life insurance?

While life insurance offers an extremely valuable and necessary protection for many people, purchasing an unnecessary product can cost you thousands (or potentially millions, when you account for the compounding growth opportunity cost). If there are others depending on your income or labor, whether it is a spouse or children or other family members, you may need life insurance. If others are dependent on your income to pay bills (like a mortgage) and would struggle financially if you passed away, you should consider your need for life insurance.

If others are dependent on your labor, for example if you are responsible for childcare and other household tasks, you should also consider your need for life insurance. In relationships where one spouse works a traditional job and the other is a stay-at-home parent, they may make the mistake of assuming only the working spouse should be covered. However, the labor of caring for children will need to be replaced in the event that a stay-at-home parent passes away and this should be considered when determining your family’s life insurance need.

Not everyone has a need for life insurance. If you are younger and don’t have anyone dependent on your income, you may not need life insurance. If you are older and debt-free with a large enough portfolio to self-insure, you may no longer have a need for life insurance.

Once you determine whether or not you need life insurance, how do you decide what kind of policy to choose?

How to choose the right life insurance

41% of Americans don’t have any life insurance, and not always because they think they don’t need it. 52% say that life insurance is too expensive, 17% believe they don’t need it, 15% don’t know what kind of policy to get, and 11% say the process is too confusing. Some life insurance policies are purposely designed to be confusing to mask high expenses, fees, and commissions, but buying life insurance doesn’t have to be confusing or expensive.

Permanent life insurance can make sense in certain situations, like if you have an extraordinarily large estate, but term life insurance is worth considering for the majority of the population with a need for life insurance. Term life insurance is pure insurance without an investment component; you are paying for a specific amount of coverage for a certain length of time, and there is no cash value. This keeps the cost of term life insurance down. A 30-year-old female in excellent health can expect to pay between $25-$30 per month for a 20-year policy with $1,000,000 of coverage. A 30-year-old male in excellent health can expect to pay $30-$35 for the same amount of coverage.

That is very affordable! For the cost of Netflix and HBO Max, you can potentially protect your family in case something unexpected were to happen to you. With how inexpensive term life insurance is, it is typically better to err on the side of caution and purchase too much insurance rather than too little.

Whole life insurance is not quite as affordable. Part of what you are paying for is permanent insurance coverage, but you are also paying higher expenses, fees, commissions, and for an investment or cash value component. This drives up the cost. For a 30-year-old female in excellent health, $1,000,000 of coverage will cost around $733 per month, which is roughly 25x to 30x more expensive than 20-year term life insurance coverage. A 30-year-old male in excellent health would expect to pay around $827 per month for the same whole life insurance policy, which is about 24x to 28x more expensive than 20-year term insurance. The chart below shows a comparison of rates for different ages, and whole life insurance is consistently 20x-30x more expensive than term life insurance.

https%3A%2F%2Fbucketeer e05bbc84 baa3 437e 9518 adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fbb733ba8 adae 4e95 9d3f

Advocates for permanent life insurance will say the higher costs are justified, but Consumer Reports found that the average annual rate of return for whole life guaranteed cash value, after fees and expenses, is just 1.5%. Whole life insurance is often pitched as an investment vehicle, a sort of forced savings account that can be used in retirement, but there are much better retirement savings vehicles available. If you aren’t familiar with all of the tax-advantaged retirement savings vehicles, like Roth IRAs, HSAs, and 401(k)s, or low-cost investment options, like target date index funds, check out these episodes of the show: “How to Legally Hide Money from the Government FOREVER in 2021” and “Are You Using Your 401(k) the WRONG Way?

How much insurance do you need?

Let’s say you’ve already determined whether or not you need life insurance and which type of insurance is best for you. How do you determine how much insurance coverage you need? The general guidance is to carry around 10x your annual salary in life insurance, but you may need more or less coverage depending on your liabilities (and goals such as education for children) and how much you want or need to provide for your family. To more precisely estimate your life insurance need, beyond using general rules-of-thumb, you need to do a more in-depth analysis of your family’s expenses. This is also something a fee-only, fiduciary financial advisor can help with.

When estimating your life insurance need, you should consider what debts you want paid off, what your family’s living expenses will look like without you (there may be additional childcare expenses), how long you want to provide for your family, and any end-of-life expenses you don’t already have covered (funeral, attorney fees, etc.). Once you reach a level where your retirement portfolio is large enough to pay off debts, provide for your family, and cover end-of-life expenses, you may no longer have a need for life insurance. Plus, hopefully adult children will be financially independent after they leave your house, typically after 18-22 years.

How to buy life insurance

Nowadays it is extremely easy to get life insurance quotes online, so make sure to compare rates from several different providers when looking for life insurance. It is not always best to select the cheapest rate available; some companies are better off financially than others, so it is important to select a provider with good financial ratings and a long track record in the industry. You can also opt to work with an independent insurance agent to get coverage if you prefer a personal touch.

Depending on your age and the amount of coverage you are seeking, you may be able to skip the medical exam. Whether or not you can skip the exam, you will need to be in good health to get the best rates, and you can expect to answer many different questions related to your health on your application.

Not everyone needs life insurance, but if you do there is no reason to put it off (and many reasons not to put it off). Term life insurance policies are affordable and offer valuable protection. If you have dependents, whether a spouse, children, or other family members, it is extremely important to take the necessary steps to protect your family in case something unexpected were to happen. Nobody likes thinking about death, but the peace of mind and security that comes with knowing your family is adequately protected is well worth the cost.

Get Daniel’s newsletter in your inbox a week early by signing up for FYI by FTE.

TAGGED WITH: insurance

Most Recent Episodes

Financial Hacks and Habits of the Top 1% (By Age)

ho wouldn’t want to have a high enough income and net worth to be considered part of the top 1%? In this episode, we’ll tell you exactly how much you need to be considered part of the top 1% - and the habits and hacks those in the top 1% used to get there.   In this...

How to Win With Money in 2023!

Financial resolutions are always near the top of the list of Americans’ most popular New Year’s resolutions. Whether you want to save and invest more, pay off debt, or have other financial goals, we will give you the tools you need to win with money in 2023.   In this...

TikToks That INFURIATE Financial Advisors

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

5 Levels of Wealth AND How to Achieve Them! (2023 Edition)

We believe there are five distinct levels of wealth, but they aren’t solely dependent on income or net worth. We’ll walk you through each of the five levels - including how to know where you are at, how to advance to the next level, and signs you are doing it right.  ...

Average Net Worth By Age in 2023!

It’s time for one of our most anticipated shows of the year: our annual Net Worth By Age show! In this year’s edition, we’ll shared updated numbers and data for 2023 and discuss the most important things for you to focus on in each decade.   In this episode, you'll...

Win Financially During a Recession! (Everything You Need to Know)

The bear market we've experienced in 2022 has been longer than many in recent memory - and some are concerned that the economy may soon enter into a recession. Here's everything you need to know to stay on-track and win financially during a recession!   In this...

The Fed Just BROKE the Car Market! (What You Need to Know)

Car prices have been on a rollercoaster ride the last few years, and it looks like they might finally be coming down. In this episode, we’ll discuss what you need to know about the current car market, pitfalls of buying a car, and how to do it the right way.   In this...

Top 4 Money Mistakes People Make During the Holidays!

There’s a reason why financial resolutions are always near the top of the list in January - many Americans spend the holiday season making financial mistakes. In this episode, we’ll discuss the top money mistakes people make during the holidays and how to avoid them....

Financial Advisors Share What They WISH They Knew About Money Earlier!

Have you ever felt like if you just knew this one thing about money earlier your finances would be in a better spot? In this episode, we’ll share the five biggest things we wish we knew about money earlier!   In this episode, you'll learn: What we wish we knew earlier...