Further Thoughts on Life Insurance

This post discusses whole vs term life insurance.

Over the last couple of weeks we’ve been discussing life insurance here on the blog. See Life Insurance Round-Up and a guest post titled Do You Need Term Life Insurance?. I thought I’d wrap it all up with my somewhat scattered thoughts on the issue and tell you what I plan to do.

If you’re in the market for some life insurance, I encourage you to do your own research or visit with a fee-only financial planner before making your own decision. Most of what I’ve learned on the topic recently has come from the round-up post and from Liz Weston’s book, Easy Money.

Who Needs Life Insurance?

The idea of life insurance never popped into my head until I had a kid. No one was solely dependent on my income until that point, nor did I have any debts jointly owned with Mrs. PT that she couldn’t handle on her own. That view was probably a bit short-sighted, but since I have a small policy with my current employer, I thought I was fine.

Mrs. PT even had a small policy of her own when I met her and I encouraged her to drop it, thinking that no single person should ever own life insurance. I mean, who’s going to benefit besides her creditors? Bob at Christian Personal Finance discussed life insurance for people with no kids in greater detail. I encourage you to check out his thoughts and the comments.

Anyway, the general rule of thumb here is that if you’re single or married with no kids and each spouse has their own solid income, it’s unlikely that you need life insurance. Everyone not in that group should seriously consider life insurance, to protect those dependent on their incomes.

How Much Life Insurance Should You Get?

The next logical question is “how much to get?” Again, I’m going to throw out another rule of thumb here:  8 to 10 times your current annual income. Your particular situation may warrant another number, but it’s best to be conservative and over insure.

Things to consider: ages of your kids, whether your spouse also brings in a equitable income, your level of dependence on both incomes, the amount of debt jointly owned by you and your spouse (the surviving spouse becomes solely responsible upon your death), and other factors. Do a search for “how much life insurance” calculators and work the numbers for yourself.

If you’re already getting life insurance from your employer, don’t heavily count on it. You’re likely to change jobs at some point and your coverage typically won’t follow you.

Can Insurance Be An Investment?

Something brought up in the comments of the guest post was the use of the term “investment” when discussing life insurance. Some find that offensive and label it a sales trick to convince you to move away from term life insurance products to the more involved (commission friendly) whole life insurance policies.

What’s the Deal with Whole Life Insurance and is it an Investment?

A friend recently contacted me through my Facebook profile saying that he had someone trying to sell him a whole life insurance policy. My friend is a single guy with no dependents. I immediately advised him that he doesn’t need life insurance at this point and that anyone suggesting he “invest” in a whole life policy is likely just wanting a commission. My friend, who’s in his 30′s with little or no debt, could do much better to invest his extra money in index funds and interest bearing savings accounts.

So are whole life policies inherently bad? I think they’re not. It could be said though that most people just don’t need them. Liz Weston points out a couple of situations where whole life might be a good choice:

1. People with disabled and/or permanently dependent children
2. People that are extremely wealthy that need insurance money to cover their estate taxes

Although there are many types of insurance products that fall under the “whole life” umbrella, it can generally be said that they are often more expensive, unnecessarily complex, and make poor use of your extra savings.

Still, insurance in whatever form, is simply a financial product that can be used for positive or negative results. A quick example:

Who’s the smarter investor:

• the 60 year old widow who currently has her money “invested” in a whole life, cash-value insurance plan? Or,
• the 60 year old widow who currently has her money invested in a diversified (defined prior to 2008) portfolio of stocks and bonds?

The former is likely retiring when she originally planned. Due to the downturn in the Market, the latter is potentially re-thinking her strategy and planning to retire later in life now that her investment has gone south.

Another type of insurance you might consider is return-on-premium term life insurance.

What We Plan to Do

We plan on purchasing a term life insurance policy (likely 20-25 yrs) on me, the primary earner, for 5 times my current income. We’ll shop around at the following providers to determine the best place to purchase the policy: Allstate (current home and auto insurer), Zander.com (Dave Ramsey recommendation), and through my professional organization discounts.

We’re also going to insist that the policy is convertible to a whole life policy (should we need it) and from a provider with a high rating.

One last point: we plan on living well within our means throughout our lives. In fact, our goal is to be able to live within one of our incomes at all times. Even when Mrs. PT (who’s now in grad school) goes back to work full-time. That being the case, we hope that life insurance is never a big part of our overall risk reduction plan. We plan on “self-insuring” as much as possible by eliminating our debts and building solid savings and retirement accounts.

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Okay. This is topic is officially dead (pun intended). Mrs. PT said she is tired of this topic and wants to just buy it and move on. So that’s what we’ll do. As usual though, I welcome your comments below if you’d like to carry the conversation forward.