At the beginning of this year I did something that I should have done years before – I took out additional term life insurance to increase the coverage I already had. I’ve had life insurance since I was 25, but our needs have changed and I started to feel insecure. I now make more money and have two children, which means I need a bigger policy to replace my income.
The craziest thing about buying term life insurance is how easy it has become. The policy I bought through Haven Life was also the type that doesn’t require a medical exam – a benefit that you can qualify for if you are of average weight and in excellent health.
In this post, I’m going to walk you through the four reasons why life insurance wasn’t a good choice for me, my family, and our situation.
- Life insurance can be absurdly expensive.
- I don’t understand how to build up a cash value against which I can borrow.
- I don’t need life insurance when I die.
- I am creating my own legacy to leave behind.
I also talk about Consumer Reports results when it comes to comparing maturity with life insurance and when whole life could be a good choice.
Why not get life insurance?
Before I bought this term policy, however, I was contacted by an insurance agent who wanted to sell me a different type of life insurance – my whole life. If term life insurance is only valid for the term you have selected in advance (20 years for this policy), then all life insurance is set up to provide a death benefit regardless of how old you get.
I immediately resisted the idea of buying a whole life for a temporary one, and for several reasons. Here’s why I would never get life insurance and why term life insurance is a good fit for our family:
# 1: Life insurance can be absurdly expensive.
Whenever someone contacted me for life insurance quotes, I immediately closed them. I found it odd that they would suggest I get life insurance without knowing anything about our finances or the type of coverage we might need anyway, so I didn’t let them bombard me with their entire sales pitch.
So no, I’m not sure how much to pay for the amount of coverage I want – $ 750,000. But it’s not that difficult to find out either.
State Farm has a calculator that has basic term life and life insurance quotes for you to compare. After I entered my date of birth, my height and weight and my state of health (excellent), the calculator spat out a few numbers. For a 20 year term like the one I bought, it was suggested to pay $ 62.40 per month or $ 717.50 per year. For life insurance, however, my recommended premium was $ 859.13 per month – or $ 9,875.00 per year.
Obviously this is just an insurer’s estimate and I may pay more or less for all of my life insurance based on the provider I choose. Still, it just shows how much more expensive life insurance can be compared to risk coverage. In this case, it costs more than ten times as much with the same degree of coverage.
# 2: I don’t understand how to build monetary assets to borrow against.
One of the biggest selling points of entire life, or permanent life insurance, is that it increases the cash value that you can borrow against. Many life insurances also pay off but are not guaranteed. As a result, some companies mistakenly market life insurance as a complicated mix of life insurance and investments.
However, I find it difficult to understand the benefit of overpaying (possibly ten times) life insurance just to build a quasi-savings account that I may have access to. It can certainly be more nuanced and complex, and I understand that life insurance can be a smart way for wealthy families to leave their heirs tax-free money. Still, is there any benefit to the average family in paying so much for life just to make money and potentially earn dividends?
Consumer Reports certainly doesn’t think so. For a study they conducted, they asked for several life insurance quotes for a 40-year-old Illinois man who is in excellent health. Through their research – and through listings offered through AccuQuote – they found that this theorist would have to pay $ 660 per year for his 30 year insurance policy for $ 500,000 and $ 6,760 per year for all life insurance with the same coverage.
While the “excess premiums” are used for guaranteed savings that translate into cash value over time, consumer reports have shown how you can accomplish the same by purchasing term life insurance and investing the difference.
“Alternatively, you could buy the 30-year term and each year invest the difference between the premiums for the entire term and the term in conservative 10-year treasury bills,” they write. After entering the numbers, consumer reports found that Treasury bills with a profit of 2.17% would get a higher return on your money. However, they also state that there would be no more death benefit after the term has expired.
Conclusion: I see no point in buying overpriced life insurance that increases the cash value if I can take out risk insurance and then save and invest the difference myself.
In the example policy I shared from State Farm above, I would save more than $ 9,000 annually by choosing the lifetime policy available, lifetime policy. Most people would be better off saving and investing that money themselves than putting it into a quasi-investment such as life.
# 3: I don’t need life insurance when I die.
Another purported benefit of life insurance is the fact that it guarantees a death benefit no matter when you die, as opposed to term insurance, which only pays if you die within the 20 or 30 year period. This is a great blessing if you are worried about running out of money to pay for funeral expenses or leaving a legacy behind. Of course, it would be great to die at the age of 90 knowing your policy is still intact.
But I don’t understand why I might need life insurance when I get older. The main function of life insurance, I believe, is to replace my income while I am young and still working – while my family is dependent on me. If I die in the next 20 years, I want to know our bills are billed and my two children have money to go to college.
What could life insurance possibly cover when I am 80 or 90 years old? My children will be adults by this point, and we will be debt free for decades. We are also saving a large percentage of our income and saving for the future, so getting life insurance in my golden years will likely be an exaggeration.
# 4: I am creating my own legacy to leave behind.
Another key argument in favor of life insurance is that it allows you to leave a legacy for your children. I will not argue against it; Obviously, any loving parent would want to leave a nest egg for their children if possible. Instead, I would argue that you don’t need life insurance to achieve this.
Instead of putting money into an entire life insurance policy and hoping it will pay off, I’d rather keep more of my money in my own hands. That way I can continue to save money, take full advantage of our retirement accounts and invest in real estate. Why pay a third party to build a legacy when you can use your own money and ingenuity to build a legacy yourself?
Too long, not read?
As Consumer Reports notes, several factors make it difficult to determine whether life insurance is ideal. For starters, they note, insurers don’t have to disclose what part of the annual premium is used to pay for life insurance and what part increases the cash value. Hence, it can be difficult to calculate or even guess at any type of “return”.
Not only that, but the huge commissions that agents earn who sell all their lives serve as ammunition for hard selling. Brian Fechtel, financial analyst and life insurance representative, told Consumer Reports that commissions for all life insurance can be as high as 130% to 150% of the first year premium, which can easily be $ 10,000 or more. How can you trust an agent’s advice when your decision to buy – or not to buy – can easily mean thousands of dollars in difference to them? In my opinion you can’t.
But that’s not the only reason I would never get life insurance. Ultimately, I try to keep our lives – and our finances – as simple as possible. For me, that means getting cheap term life insurance and being in control of as much of our hard-earned money as possible. If I want a cash value that I can borrow against, I’d rather build it up in a savings or investment account with my name on it.