I’ll be honest with you: I’m not a big fan of life insurance.
It’s a product you pay for with hopes that you never have to actually use it. It’s also a product that gets pushed hard by salespeople, and that pressure can set you up to make a bad decision when you go to buy a policy.
A life insurance salesperson probably won’t volunteer to tell you when you don’t even need life insurance. So it’s important to understand when you need this kind of protection — and when you can skip it.
Be Aware of Potential Conflicts of Interest
As a fee-only financial planner, I don’t sell any kind of product nor do I make any kind of commission from any work that I do.
I believe this is the best way to eliminate conflicts of interest. It’s one way I can give my clients confidence that the advice they receive from me is truly in their best interest.
But not everyone in the financial services industry works this way. Life insurance agents, for example, get paid commissions based on the policies they sell.
That’s an inherent conflict: they’re incentivized to sell the biggest policies possible because that’s what allows them to make the biggest income possible. That’s not to say that all life insurance agents will do this, but the incentive to do so is clearly there.
But the people they’re selling to may not really need the big policy they end up getting sold. They might be better off with a smaller, cheaper policy. Or they may not need life insurance at all.
The Purpose of Life Insurance
It’s little wonder that insurance gets confusing:
- The people selling insurance may try to sell you on a larger policy than you actually need, because they earn a bigger commission when they do.
- There may be periods of time in your life when you truly do need insurance.
- There are periods of your life when you don’t need insurance.
So how are you supposed to sort through everything and figure out what you actually need, from what type of policy to get to how much coverage is appropriate? And those questions assume you actually need coverage at all.
First, it helps to have a fee-only financial planner working as your fiduciary on your side. I don’t sell life insurance — but I do help my clients review quotes, policies, and coverage to ensure the product they buy is the best one for them.
Second, it’s important to understand the point of life insurance. It does serve an important function: it protects anyone dependent on your income should you pass away.
You May Not Need Life Insurance Until You Have Dependents
In other words, if you’re single, childless, and you don’t support anyone with your income, you may not need to worry about having a life insurance conversation. If you were to pass away, no one relies on your income — so there’s no need for anyone to receive a life insurance payout.
You can take the money you might spend on monthly premiums and save or invest it instead to grow your nest egg. If you’re concerned about leaving something behind for a particular individual, they could be named your beneficiary on those assets.
But if you’re married, have children, or claim other dependents, then it’s time to think about your life insurance needs.
Your policy will protect these people — your spouse, kids, or anyone else that you support monetarily– and provide them with the financial means they need should you no longer be able to do so.
This doesn’t just mean minor children. Again, this could include your spouse if they’re a stay-at-home parent, or if your current household expenses would become unmanageable on their income alone.
Most People Need Term Life, Not Whole
Deciding on what kind of policy (and how much coverage) is a more complicated situation that you can talk through with your financial planner. But for now, know that most people who need life insurance need term life insurance.
In most situations, you’ll want to avoid whole life. It’s expensive and although someone might try to tell you it’s an “investment,” it’s not. It’s life insurance with a built in savings account with extra fees. And any cash inside it really isn’t accessible for many years down the road.
Unlike term however, whole life does not expire unless you stop paying the necessary premiums. This means that it will stay in place until the day you die.
Most people don’t need this kind of protection because most of us don’t have dependents for our entire lives: children grow up and become independent, we pay off mortgages and debts so there are no more liabilities, and we bank assets that will also be distributed to heirs when we pass. Caveat: Life insurance can play a role in reducing estate taxes for wealthy families, but most people do not fall into this more complex category.
Just like with most things, there aren’t exceptions where whole life does make sense. But for the majority of us, what we want to look for is a term life policy.
Term life covers you for a set period of time, like 10, 15, 20 or 30 years. The life insurance expires at the end of the term — and you also get to stop paying monthly premiums.
For example, a 20+ year term policy might make sense if you have young children, especially if they plan to attend college. This way you can ensure that they will have the proper financial support until they are able to support themselves after school. Another reason might be if you have a spouse that couldn’t handle the mortgage payment without your income. You may consider getting a term policy that lasts until the mortgage is paid off.