Every so often, I get questions on the topic, so I want to clear up two myths about life insurance.
- Myth 1: Nobody needs life insurance in their twenties, but everybody needs life insurance when they get older.
- Myth 2: Certain types of life insurance are a smart way to build wealth.
Fact #1: You Need Life Insurance If (And Only If) You Have a Family
Don’t base the decision to purchase a life insurance policy on age. If you’re 24 and already have two children, unless you’re already wealthy, you should have life insurance. You may be healthy, but accidents happen, and the responsible thing to do is to leave your children with something. On the flip side, if you’re 25, 30, or even 45 and single, you do not need life insurance. If you kick the bucket, so what? Your salary wasn’t putting a roof over anybody’s head but your own.
So as soon as you have a child, you need to start thinking about life insurance. You only need to carry life insurance until your oldest child moves out (or finishes college, if you want to help provide for higher education) or you will have saved enough to provide for your family if you die. (If you’re investing wisely, you will hopefully have significant assets in 20 or 30 years). And with guaranteed level term life insurance, the younger and healthier you are when you purchase policy, the less you pay for the entire 20 or 30 years you carry the policy.
Fact #2: Term Life Insurance Is the Only Kind You Should Buy
Unfortunately, seventy percent of life insurance policies sold in America these days are cash value life insurance policies as opposed to term life insurance policies. What’s the difference?
- Cash Value Life Insurance: With a cash value policy, you pay regular premiums to the insurer and the insurer invests your premiums (minus expenses). If you die before the policy expiration, the insurer pays out a full death benefit. If you don’t die before the policy expiration, you get back your premiums plus interest, minus expenses.
- Term Life Insurance: With a term policy, you pay regular premiums for a fixed term (20 or 30 years). If you die within it that term, the insurer pays a death benefit. Otherwise, when the term expires, you do not get any of your premiums back.
Okay, so based on the above descriptions, cash value sounds like the better deal. After all, with cash value you get to keep some of your investment if you don’t die. Why should you go with term life insurance?
For one, compared to investing wisely, on your own, in mutual funds, cash value life insurance makes a pretty lousy investment. Sales people promise all sorts of great returns, but after expenses, buying a cash value life insurance policy can be like leaving your money in savings account for 30 years. In addition, term life insurance is about 10 times cheaper than cash value policies.
Dave Ramsey also recommends term life insurance above cash value, citing the following example:
If a 30-year-old man has $100 per month to spend on life insurance and shops the top five cash value companies, he will find he can purchase an average of $125,000 in insurance for his family. The pitch is to get a policy that will build up savings for retirement, which is what a cash value policy does. However, if this same guy purchases 20-year-level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100.
Ramsey goes onto give average returns, after expenses, for whole life (2.6 percent), universal life (4.2 percent) and variable life (7.4 percent). That doesn’t sound half bad, until you consider that many investors get between eight and 12 percent average annual returns with mutual funds.
So the lessons are: If you have a family, you need life insurance (regardless of age) until you have saved enough to provide for them if you die. Do not buy cash value life insurance, get a term policy and invest the difference.
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I'm David Weliver. At 26, I had NO savings and NO financial plan. I was maxed out, stressed out, and fed up. Then, I changed. I repaid $80k of debt, tripled my income, and bought a home. I'll show you how to get similar results. 
I’ve been trying to be rational about buying a life insurance policy for a bit, and have gotten stuck on something:
My husband and I are both young professionals with advanced degrees and good career prospects, even if our incomes aren’t that high right now. Either one of us could be a functional single parent; if, god forbid, something should happen to one of us, really all the other would need would be a cushion to get back on their feet for a while while recovering. Say, 150k.
If, however, something would happen to both of us… we would want FAR more that twice that amount to be left for our kids. Really, we’d like more on the order of 1-5million, honestly! Enough to cover all costs associated with their care, including money to let them travel back and forth between where my family and my in-laws live (which is on different continents).
So, what we’d like to do is each be insured for ~200k, and have a 5 million “if we both die within 2 years of each other” policy on top of that. But, such a thing doesn’t seem to exist, and I can’t understand why – there have to be other people with the same need! The closest I’ve found is a second-to-die policy, but it’s a bit of a stretch.
Why isn’t this a common need – is there something I’m missing? If it is a reasonable idea, what’s the best way to pursue such a policy?
nice
@T:
Is this what you’re looking for?
Joint Life
Only a few companies offer this variation, available either as whole life or term, but it is worth mentioning as it can save a significant amount of money and be an option when one person has pre-existing health conditions. Joint life insures two or more people on one policy and for one premium that is more than it would be for the youngest person, but less than it would be for the oldest. The policy can be set up as first to die or second (last) to die (also known as “survivor”) option. The “first to die” pays when the first person on the policy dies and provides a survivor with an income. The survivor or second to die option assumes that the money will not be needed until the last person on the policy dies. Then it provides heirs with a legacy. This variation provides a great tax free way to pay estate taxes.
You have an excellent point, T. Unfortunately, I don’t have an answer. I’ve never heard of such a policy, even though it makes perfect sense.
My only guess is the insurance companies know they can make a lot more if couples insure both parties to the maximum amount. The chances both parents will die at the same time, though certainly not nil, are slim. That means such insurance couldn’t command a big premium.
If I learn anything else, I’ll post it hear. And if anybody else has an answer, please share!
Regardless of whether or not one is single, he should have life insurance to cover the costs of death. Children are not the only family to consider in the event of one’s death.
My parents are not in a financial position to pay for the costs of dealing with my remains or the transportation, legal, and general costs of dissolving and liquidating my estate. I have carried a small amount of life insurance for fifteen years to offset such costs for them should the need arise.
Children are often the largest concern as survivors for most people, but think forward to who will be handling your death arrangements and provide financial resources for them to do the job. Otherwise, you might be making an emotionally difficult time financially difficult as well.
All of the buy term and invest ther rest proponents, including Dave Ramsey and Suse Ormand could make easy $100,000 if able to answer the open challenge on the internet by Pamela Yellen. This challenge has been posted for more than a year already.
The reality is they cannot prove “buy term and invest the rest is better than learning to reduce your wealth transfers and get rid of banks and financial institutions(By the way those are the ones that sponsor Dave Ramsey and Suse Ormond).
They, the buy term and invest the rest, also say that sellers of permanent life insurance offer unrealistic expectations. In the case of whole life insurance promoters, we are backed by about 100 years of performance; in the case of mutual funds and stocks, they are backed by 5 to 15 years, and of course past performance is not guarantee of future performance.
Any way, when you learn the features and benefits of a whole life insurance engineered to perform according to the Infinite Banking Concept, by reading “Becoming your own Banker” written by Nelson Nash, you will be able to help more people. In the mean while the challenge is still posted.
I just found this site and I am loving these articles. I would like to ask a question about life insurance. First off, I am 25 and single with no dependends. When I joined the military in 2003 I opted for SGLI which was 250k for $19.99/month at the time. It has since been increased to 400k for $27/month which I have automatically deducted from my drill pay (national guard). When I was deployed to Iraq I had two additional policies tailored for the military: SSLI and AFBA (both have no war clause) added which in all totaled $750k… just in case I bit the bullet my dad would be a very wealthy man. I plan on cancelling the two additional policies but wanted to know your advice on SGLI. Every person I have ever spoken with tell me to keep it at max 400k for $27.00 a month because it is so damn cheap. Like I said I am single with no dependends and my father is my next of kin. If I get hit by a bus tomorrow I wouldn’t mind seeing his net worth increase by almost half mil, you dig?
p.s.
about those two i am thinking of cancelling. since i enrolled in those at age 22, they say I can keep my same rate for the life of the product. so if i have no break in coverage i theoretically will be paying my very low age 22 rates even at age 50 correct?
do i even need any of it??
Regarding you SGLI life insurance coverage, the best thing to do would be to read the policy carefully. You will want to look at how long rates are guaranteed, and what the conversion to permanent coverage might be. Talk to a qualified independent agent to get a comparison. Remember, rates are inexpensive at your age because the chance of death is remote. Make sure that you have as many choices as possible later in life when your family may need support.
Good luck!
There are lots of big names out there on TV and radio saying that buying term and investing the difference is the only way to go…they are also saying that all you have to do is invest in a 12% mutual fund. I’m not sure where they are finding a 12% mutual fund…and they are failing to calculate the taxes involved which would turn that 12% into around 8%. Every situation is different, find someone you trust to help you with the logistics.
Finding someone that is more than the average life insurance agent is key if you are looking to use life insurance as something more than death benefit. there are some incredible advantages to using cash value life insurance but they aren’t taught to every producer.