Do you need life insurance after all?

Even if you didn’t need life insurance at one point, it doesn’t mean you don’t need it now. But first we need to talk about what it is.

I’d like to lighten the mood right now and say that you’re going to die.

(Actually, with that out of the way, everything is going to be lightened by comparison!)

If you’ve gotten to the point in your life where you’re firmly in the “adult” category, with jobs, responsibilities, the whole deal, you’re probably no stranger to some not-fun administrative tasks.

But I’d argue that dealing with life insurance is probably only bested by “making a will” in terms of the least fun to deal with in your own administrative tasks department.

But thinking about—and maybe acting on getting—life insurance is also important. Not for yourself, of course, but for the people around you.

Life insurance is, in an odd way, a love story.

What is life insurance?

Life insurance is a contract that pays out money to your beneficiaries upon your death. So it’s more accurately called “death insurance”.

So immediately, realize that life insurance doesn’t actively benefit you at all. You take out the contract and pay into the plan month after month, but when you finally can take advantage of it, it won’t really matter to you.

But it will matter to those around you, because the money gets paid out to your estate / your beneficiaries. This money can settle your estate, pay for funeral costs, or just to leave money to others.

That’s the high level. But of course there are more details to go into.

The different types of life insurance

With any complex financial arrangement, there is more than one type of life insurance. Generally, these fall into two camps:

• Term life insurance
• Permanent (whole) life insurance

(There are some other options, but if you’re that deep into the weeds, you probably know those already. Also, as I’ll say below, I personally don’t think they are worth it for most people.)

Term life insurance is very simple. You take out a policy for a fixed amount (say $1,000,000) and a fixed amount of time (say, 20 years), and you agree to pay a monthly premium for the duration. If you die within that time period, your beneficiaries get that fixed amount, regardless of how much money you paid in to the plan. If you don’t die within that term, no one gets anything.

Permanent/whole life insurance works a little differently. In this, there is no term. You pay forever, well, or until you die. There is a specific death benefit like above, but there’s also a cash component. The money you put in can grow as an investment, so that the longer you pay in, the more your estate gets out.

Why I like term life insurance

Of course I’m not going to tell you what type of life insurance best befits your situation, but here’s why I like term life insurance and think it’s the best for most people:

• It’s simplest. When you’re dealing with difficult financial decisions, simplicity is key. And term is very simple. You decide on a payout and length of time, and then pay a fixed monthly premium. If you die during that length of time, you get that payout. If you don’t, you don’t. That’s it. There’s no question of how much you put in versus how much you get out.
• It’s cheapest. Look it up. Term life insurance is significantly less expensive for the same payout.
• You can do your own investing. Some of the benefit of whole life is that your money is invested. But you can do that yourself, and probably at a higher return than whatever the insurance company would do for you. You wouldn’t pay extra to your car insurance company so that they could invest the money for you, would you?

Do you need life insurance?

Not everyone needs life insurance. You may or may not be one of them.

The big question you have to ask yourself is: do you have loved ones that you wish to financially take care of after you die?

The details vary, but that’s the gist of the matter. If you answer yes to the above, then you want life insurance after all. If not, then you don’t.

If you have a spouse who you want to take care of, you want life insurance. If you have dependents that you want to take care of (or are currently supporting), then you want life insurance. If there’s someone else you want to take care of, you want life insurance.

If none of the above is the case, like for example, if you’re young and just starting out in life, you don’t need life insurance. But one day you might.

How life insurance can replace your income

Through the life insurance payout, you have the ability to, at the very least, pay for your own funeral expenses and to settle the debts of your estate. But you also have the ability to replace your income.

Here’s what I mean. Long-term investments earn money at a higher-rate than short term savings accounts. Money invested into the stock market (through mutual funds and the like) can earn an average annual return of 8% or more over a long period of time, often much more.

So an insurance payout to, say, a spouse or a dependent, isn’t necessarily a win-the-lottery moment, but instead a way to supplement your salary for the long-term.

Say you pull in $100,000 a year. If you had life insurance to the tune of $1.25 million, your beneficiary could invest that money when you left it to them. They could then potentially pull out 8% of that each year for the long haul without ever dipping into the principal. 8% of $1.25 million is, of course, $100,000.

It wouldn’t replace you, of course, but it could replace your income.

Life insurance is a gift

Life insurance can be expensive, and with term insurance, there’s no guarantee that it will even pay out (if you don’t die during the term, that is).

But I do think it’s worth looking to the analogy of car insurance. You may pay your car insurance premium for years. If you don’t get into an accident, would you consider all that money wasted? I wouldn’t, and not just because it’s illegal to not have car insurance.

Ultimately, life insurance is a loving gift to those around you, to ensure that they have fewer concerns after your death than might otherwise be.

So actually, I was wrong above. Having life insurance can benefit you after all, by giving you peace of mind, knowing that your loved ones are going to be taken care of. Your passing will be mourned, but that doesn’t need to come with other additional concerns.