Do you need life insurance? If you have dependents, is it a must? If you get life insurance, what kind should you buy?
If you’re expending the time and effort to become financially successful, you’ll want to ensure that your loved ones are provided for in the event of a loss. That might involve life insurance. You should determine whether or not you need it and, if so, what kind of insurance makes the most sense for you and your family.
Let’s take a look at life insurance advice from The Wealthy Barber by David Chilton.
Purchase Life Insurance, But Only If You Need It
Do you need life insurance? Chilton says that it depends. Because the purpose of life insurance is to protect your dependents in the event of your death, he advises against buying life insurance if you’re single and you don’t have kids. Even if you do have dependents, you still don’t need to buy life insurance if your “living estate” (your assets minus your liabilities) is sufficient to provide for your spouse and children, pay off your debts, and pay for funeral expenses.
If you don’t fall into either of these categories, you should purchase life insurance. To determine how much to buy, first consider everything your dependents will need to live comfortably in your absence—for example, your debts paid off, funeral expenses paid, college expenses for your kids, and sufficient income for your spouse. Then purchase an additional amount of insurance coverage to factor in account inflation. For example, if you want to ensure that your spouse receives an annual income, you’ll need to account for the fact that any set amount will be worth less and less as the years go by.
Chilton explains that there are two main types of life insurance. Term insurance lasts for a specific period of time, and pays out the amount of the policy if the insured dies. This is basic life insurance, and it’s relatively inexpensive.
Cash-value life insurance is a combination of term insurance and a forced savings program. The savings is invested for you and can be paid out if you cancel the policy. The premiums and commission rates are higher on this type of insurance, and rates of return are often lower, partly because the insurance company has to cover expenses and make a profit. In addition, up-front costs are high, and the term component costs more than it would outside the “bundle” of the cash-value policy.
The primary advantage of cash-value life insurance is that the savings portion of the policy is allowed to grow tax-free until withdrawal. However, this advantage is often negated by the disadvantages.
Chilton’s advice is to buy the cheaper term insurance and invest the money you saved, because you can probably make more by investing it on your own than a cash-value policy could by investing the savings portion of your policy for you.
You should also make sure that the term insurance you buy is renewable and convertible. Renewable means that when the term expires, you can renew the policy without having to take a physical to prove you’re insurable. Convertible means that if you need insurance past the time when you’re allowed to renew the term policy (usually 65 or 70), you can convert the face value of the policy to any cash-value plan sold by the insurance company without proving renewability.
(Shortform note: There are many different life insurance products with a variety of features and benefits. You might want to consider enlisting the services of an insurance broker who can help you search for life insurance (and other types of insurance) across several insurance companies. Whether or not you use a broker, make sure to shop for insurance carefully by comparing rates and selecting the policy that works best for you and your family. An important consideration is whether to include a long-term or chronic care rider in your life insurance plan. As discussed above, long-term care can be extremely costly; one method of planning ahead is to address the potential expense in your insurance policy.)
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Here's what you'll find in our full The Wealthy Barber summary :
- A guide to becoming financially successful by following simple principles
- Why you might not need to buy life insurance
- Why you should only buy a house if it’s right for you