Why I’m thinking about getting life insurance (before I need it)

Ski slope

Life insurance is the teeth-flossing of financial products. It’s something you know you need to deal with, but you really don’t want to.

Luckily, unlike flossing, there are those who don’t really need it.

The question about life insurance is answered by asking the question “does anyone depend on my income?” If yes, then you need life insurance, otherwise, you don’t.

And no one depends on my income, at least not at this moment. That may change at some point, potentially in the future, of course, but I don’t know that.

So why would I be thinking about life insurance now? As usual, it’s a numbers game.

Let’s review

Life insurance is, for most people, very simple. You purchase what is known as “level term life insurance”. This means that you purchase a certain amount (say $500,000), select a term (say 20 years) and you pay a premium each month. Should you die in that 20 year period, your beneficiaries get that purchased amount of life insurance. If you don’t die, no one gets anything (aside from the happiness of you not dying, of course).

Aside from some estate planning wizardry that would benefit wealthy people, I’ve never seen a good reason to investigate any other product such as whole life, variable life, cash value, or any of the other financial products advertised by insurance agencies (remember the rule).

But this is a good thing, because this is by far the simplest (and cheapest) life insurance option. Looks like Occam is our insurance salesperson too!

So why buy now?

Periodically, I get a brochure in the mail from TIAA (aka TIAA-CREF), a financial services company most associated with universities and other cultural fields. I would put them right behind Vanguard in terms of financial services companies I have familiarity with and trust.

They really want to sell me life insurance though, and I can understand why. I’m pretty much in prime life insurance purchasing territory, given my age and place in life. These brochures always include a giant table showing how much it would cost per month to purchase term life insurance at every age from 25 on up.

It shouldn’t be surprising that this price goes up as one ages. But what is more interesting to me is that the monthly premium rises non-linearly. Check it out:

Term life premiuims graph
Sample graph of monthly premiums for me as a function of time (years ahead of today). Using 20 year term. Note that the premium itself doesn’t increase, but depending on my age, the premium will lock in at different rates.

(I used this form from TIAA to get these values.)

Example #1: Now versus waiting 10 years

So given this hypothetical, if I were to buy a 20 year policy today based on the quotes I found, I would pay $32.86 a month, for a total of $7,886.40. If I were to buy another 20 year policy after that, assuming today’s rates (a big assumption, but it’s all I have to work with), I’d pay $207.01 a month, for a total of $49,682.40. (Big difference!) Total is $57,568.80 for 40 years of coverage.

Now, instead of starting now and buying a 20 year policy, suppose I waited 10 years, and then bought a 20 year policy and then a 10 year policy, so we’d end at the same point. In this case, in 10 years, I’d be paying $79.22 a month, for a total of $19,012.80. Then the 10 year policy after that is $113.07 a month, or a total of $13,568.4. Grand total is $32,581.20 for 30 years of coverage.

Okay, so in this case, waiting makes sense. 10 fewer years of coverage means a savings of almost $25,000.

Example #2: 55 vs. 65

But remember the non-linearity here.

If I were to buy a 20 year policy at age 55, I’d pay $146.22 a month, for a total of $35,092.80. If I were to wait 10 years and buy a 10 year policy at age 65, I’d be paying 233.21 a month, total of $27,985.20.

So assuming you don’t need the coverage early on, waiting still makes sense, though notice that the difference becomes smaller here.

Now these examples are only that. If you have a different life situation, your graph may accelerate much quicker than mine. In which case, it might actually make sense for you to buy coverage now, since it might result in less money paid out over the long haul.

But for me, I’ll keep monitoring the situation. It doesn’t look like preemptively purchasing life insurance makes sense for me now.

That said, I’m still working on life insurance in a different way. How? Stay tuned.

But enough about me. What’s your plan for life insurance?

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