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 who often try to use guilt and fear to give into their pitch.
That kind of pressure can set you up to make a bad decision when you go to buy a policy, and it certainly doesn’t leave room in the conversation to explore one potential possibility for you: that you don’t even need life insurance.
A life insurance salesperson probably won’t volunteer to tell you when that’s the case. Worse, you might not even know you’re dealing with a salesperson, as many people approach 30- and 40-somethings in the guise of an “advisor” when really their main goal is to sell you the biggest policy possible.
Given all this, it’s important to understand when you need the kind of protection that life insurance can provide you — 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 have an incentive to sell the biggest policies possible because that’s what allows them to make the biggest income possible.
Insurance agents also don’t have to call themselves such. They can put “financial planner” or “advisor” on their business card and offer you a free financial plan… which ends in the recommendation that you buy a pricey whole life insurance policy.
(This isn’t just hypothetical. It’s the exact tactic of a number of insurance companies.)
None of this is to say that all life insurance agents are bad people out to get you (and your money), but we need to start by understanding the incentives to make sales first and consider your actual needs much farther down the priority list.
Again, you might not need the big policy a salesperson tries to convince you to buy. You might be better off with a smaller, cheaper policy — or you might not need insurance at all.
Here’s how to know what camp you fall into.
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?
First, let’s start by understanding what life insurance is. It is a product, designed to meet a specific need. It is not an investment. It is a utility that serves a function.
Second, the purpose of life insurance is to protect anyone who is financially independent on you should you pass away and no longer be able to provide for those people.
So if no one depends on your income for their financial wellbeing… then you might not need a life insurance policy at all.
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 be able to do without spending money on a life insurance policy.
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 (who doesn’t need a reliable stream of income for you to get by), they could be named your beneficiary on those assets.
Again, this all goes for you if you’re single and no one is going to be financially burdened by your passing.
Things chance if you’re married, have children, or claim other dependents. In these situations, it’s time to think about your life insurance needs.
Here’s When You Need to Start Considering Your Need for Coverage
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.
Minor children are the most obvious beneficiaries for life insurance policies. Anyone under the age of 18 will likely face financial hardship should their parent or guardian pass away.
In this case, the death benefit on your policy would go to your children, providing them with financial means until they’re old enough to earn their own incomes.
Some parents want to make sure adult children receive a benefit too, and that’s an option to consider. You could consider a policy that would protect your college-aged or young adult children if planned to support them through their early 20s.
And remember, it’s not just your income you might need to replace. Your spouse may need life insurance, too, even if they’re a stay-at-home parent.
If you would need to hire help to manage all the work they currently do — housekeeping, childcare, etc — then you need a life insurance policy that would provide enough of a benefit to help you pay for help in their absence.
You may also need life insurance if you’re married — even if you don’t have kids. If you have shared debts, like a mortgage, you want to make sure your spouse could easily pay off those balances even if they could not longer depend on your income to help accomplish that.
Part of a good life insurance analysis for married couples would look at the general impact of a loss of income for one spouse. For example, would they be able to maintain their current lifestyle if the household income lost your contribution to the total?
You may want to get a policy that allows the surviving spouse to maintain the standard of living you currently enjoy, so they wouldn’t be forced to move or make drastic changes in the wake of your passing.
Most People Need Term Life, Not Whole or Permanent Life Policies
Now you know when you likely need a policy, and when you can probably skip it. But how much insurance do you need? And what kind of policy makes the most sense?
As far as what type, most people who need life insurance need term life insurance.
Yes, there are exceptions. If you are ultra-super-wealthy, whole life may be a good product to use because it can play a role in reducing your estate taxes. In some circumstances, families with special needs family members might also benefit from something like a whole life policy.
But for almost everyone else, term probably makes more sense. Whole life insurance or permanent life insurance is expensive and you can get a better solution for a lower cost through a term option.
Again, insurance is not an “investment.” It is a product. Whole life will get you a life insurance with a built-in savings account that comes with extra fees.
Any cash inside it really isn’t accessible for many years down the road (and you’ll probably get a better return on your money by simply investing it in a diversified portfolio anyway).
Finally, whole life does not expire unless you stop paying the necessary premiums. This means that whole life policies stay in place until the day you die (and you’re paying for them along the way).
Why is this a factor? Other than the cost, 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; we start building assets that will also be distributed to heirs when we pass.
As that list alludes to, you don’t need a whole life policy to accomplish those kinds of goals.
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.
It covers you for the period of time you need coverage, but then is something that can drop off your list of expenses once it’s no longer needed.
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.
Or maybe you get term insurance that matches up with the number of years left on your mortgage payment — this way, your spouse could use the death benefit to pay off that loan should something happen to you (and your income).
Insurance Serves an Important Purpose – But Don’t Get Oversold
The bottom line is that life insurance is important — but most of us cringe when we hear that phrase because we associate it with pushy salespeople who are seeking their next commission.
You can have a better experience by educating yourself first. Ask questions, do some research, or talk to a fee-only financial planner about what you need to look for when it comes to a policy.
That “fee-only” phrase is important, because it means that planner won’t sell you products or make a commission based off what they recommend which reduces the financial conflicts of interest.
The next step is to seek out only the amount of insurance you need, which will be based on things like your current expenses, your goals, and the needs of the people who would benefit from the policy. Finally, look at how long you need to protect those people for to help determine the term length of the life insurance you choose.