Life Insurance – Yes or No?

Life insurance is one of those financial products we’re all told to get. From advertisements to financial gurus, it seems like the ultimate safety net for everyone. But here’s a radical thought: life insurance is not for everyone. That’s right. Despite its merits, there are scenarios where life insurance might not be the right fit, and blindly following the herd could lead to unnecessary expenses.

Think about this as you read on – do you have any financial obligations that would exist after your death and who would those fall on? The answers to this don’t necessarily need to lead you to having life insurance as your solution.

Perhaps your only debt would be funeral expenses – and for something like that there is a simple solution to prepay rather than having it fall on your friends or family. That would be a very isolated case but just one example where life insurance may not be your best option.

Let’s explore instances of folks who may or may need life insurance, what type of life insurance, and also how to decide what you need and when.

Not Every Financial Situation Requires It

The primary purpose of life insurance is to provide a financial cushion for dependents after you pass away. But what if you have no dependents or anyone financially reliant on you? Maybe you’re single with no children, or perhaps your children are grown and self-sufficient. In these cases, shelling out premiums for a policy might not make sense. You could invest those funds elsewhere, growing your wealth instead of feeding the insurance company.

For individuals with significant wealth, life insurance may be unnecessary. If your assets are substantial enough to cover estate taxes and provide for your heirs, why pay for insurance? You’re effectively “self-insured.” Sure, there are whole life policies that serve as tax-efficient wealth transfer vehicles, but if that’s not a concern, there are plenty of other ways to pass on wealth.

It’s Not a Substitute for a Solid Financial Plan

Life insurance can’t fix a broken financial plan. If you’re living paycheck to paycheck or dealing with overwhelming debt, the answer isn’t necessarily life insurance. It’s better financial management.

While life insurance may offer temporary peace of mind, it’s no replacement for budgeting, saving, and investing wisely over the long haul. Life insurance is not a fail-safe solution for financial mismanagement.

Whole life insurance and other forms of cash value insurance are often sold as a combination of insurance and investment. The promise of growing cash value alongside life coverage sounds appealing, but here’s the reality: whole life insurance can be complicated, expensive, and may not perform as advertised. In many cases, you’re better off separating insurance from investments, opting for term life insurance and investing the difference in a low-cost fund.

Health Considerations and Premiums

Another point to consider is cost. If you’re older or have significant health issues, life insurance premiums can skyrocket, making the coverage not worth the price. Instead of locking into a pricey policy, alternative strategies such as saving aggressively or considering a guaranteed issue policy might be a better fit.

What if You DO Need to Insure?

Life insurance has its place—it’s invaluable for families with young children, dependents, or those with complex financial needs. However, it’s not a one-size-fits-all solution.

If you have decided you do need life insurance the sooner the better because the older you get the more you will pay – plus you never know what type of health issue is lurking around the corner. If and when you make the move and go into underwriting, trust us they will uncover every detail of your health to make sure you are paying the fairest (eh hem expensive) premium possible.

Remember when you went to the emergency room because you had chest pains – and it turned out to be nothing – well thank goodness for that but that will come up. They will want to know every detail, what the cardiologist said, how you have been since, have you seen another cardiologist as a follow up and so on…so the longer you wait the higher the probability that something won’t work in your favor.

The bottom line here is IF you have determined you need coverage and you are in excellent health, then go for it now.

How Much?

It is a good idea to get a ballpark on your own before seeking guidance from a professional. We could put you to sleep immediately if we dove into some calculations but general tips and methods that are often used can provide a good benchmark to get you started.

The death benefit should provide enough replacement income to care for your family until your children reach maturity – so if you have two breadwinners or one, think of it in those terms – what income is coming in and how will it need to be replaced.

Formulas:

• Human Life Value: 30X your income between the ages of 18 and 40; 20X income for age 41-50; 15X income for age 51-60; and 10X income for age 61-65. After age 65, coverage is based on net worth rather than income.
• Multiply your income by 10 – and add college for each child
• DIME (Debt, Income, Mortgage, and Education) – total debt, funeral expenses,total income for the next X number of years depending on your children’s ages, and college expenses

Remember this is an overview – you have to really look at your lifestyle and the people you are leaving behind to determine how much they would need in your absence.

What Type?

We’ll cover the basics, this can get fancy – but the types to look at are Term, Whole Life, Universal

TERM

• You pay a premium for a period of time – typically between 10 and 30 years – and if you die during that time a cash benefit is paid to your beneficiary
• Depending on the type of policy you choose your premiums may stay the same, vary or even be partially reimbursed (have no fear, we’re talking insurance there is always a catch)
• Good choice for people with young children who need a lot of coverage to replace income until they grow up.
• Protection is temporary
• No cash value component
• May be convertible into a whole life policy

WHOLE

• Coverage lasts your entire life as long as premiums are paid
• Cash value component
• Good choice for estate planning purposes

UNIVERSAL

• Some similarities to whole life, can provide lifetime protection
• Cash value component
• Flexibility to raise or lower premiums within certain limits, which can negatively impact cash value growth and the size of your death benefit

There is so much more we could go into so just be aware there are other ‘sub types’ available, riders available, tax strategies and so on – we’ll explore that in future articles.

So, here’s the bottom line: life insurance can be a smart move—if you truly need it. But if you’re buying a policy just because someone told you it’s ‘the responsible thing to do,’ take a step back. Ask yourself whether that money could be put to better use elsewhere.

After all, life insurance isn’t a magic wand for fixing every financial problem, and if you don’t need it, you’re better off saving, investing, or maybe even splurging a little. Because let’s be honest, life is short—and no insurance policy is going to change that.