Should you buy life insurance? It can be a touchy question. Some people believe that as responsible adults, it’s important to have life insurance in case you die. But this is not always true.
In my blog post Insurance, Simplified: Your Income, I covered life insurance to a degree.
There are some scenarios where you just do NOT need life insurance.
You are Retired with no Debt
Are you already retired? Prior to retiring, did you pay off all your debt, including your mortgage? Do you have an adequate nest egg for your spouse/partner in the event of your death? If so, then you likely no longer need to carry life insurance.
If you have a whole-life type policy that has cash value and is paid in full (no more premiums), absolutely keep it. In that situation, your life insurance policy is no longer a liability (something you must pay for) but has become an asset.
But be sure to evaluate your policy carefully. If the face value, or death benefit, was small to begin with, your cash value may have grown to match or surpass the benefit. Determine what your tax consequences would be if you simply cashed it in. It may be advantageous to put that cash value to work elsewhere in your financial life.
Aside from continuing to carry a mortgage, two other scenarios might recommend maintaining your life insurance into retirement. If you have a special estate planning need to fill, such as funding a special trust, maintaining your life insurance makes sense. However, in the current estate planning environment, this sort of planning is rare.
The second scenario that supports the idea of maintaining your life insurance involves having a pension. If you retired with a pension that your spouse or partner will not benefit from if you die, consider maintaining (or acquiring) life insurance. The reason is that in the event of your death, the life insurance proceeds can replace the now absent pension.
You are Single with no Dependents and no Debt
The focus for all life insurance decisions should be income production. Suppose you died today, who might suffer due to the loss of your income? If you can name anyone (spouse, children, parents, etc.), consider acquiring or maintaining adequate life insurance.
If you don’t have financial dependents and you have no debt, you don’t need life insurance. Even if you have debt, it’s unlikely your family would be responsible if they are not co-signers on the loan or a spouse on a joint debt. However, many people like to make sure they “clean up their messes” in the event they die prematurely. Having life insurance to ensure your estate is tidy is a responsible way to make life easier for those you leave behind.
You are a Child
It is unnecessary to buy life insurance on a child.
New parents are subject to pressures from all sides to do the “responsible thing” when their children are born. Parents feel the pressure from advertisements suggesting you insure your child to guarantee his/her insurability in the future. This messaging hits parents in the emotional gut since we’re focused on the nurturing and care of our offspring.
But it is a crap argument.
First, these policies are generally whole-life policies, meaning you pay premiums either forever or for a period of years, and the policy is in place for life. Those policies also typically have very low face value (death benefit) denominations.
Here are some numbers to drive home the point. If your child is one today, he is likely to live another 80 years or so. Assume you are considering a $10,000 face value policy, and your child only lives to age 65. That $10,000 benefit in 64 years would buy the equivalent of what $1500 would buy today. And that doesn’t include factoring in the premium you paid to purchase it.
A better approach is to save the money you might spend on insurance premiums in a moderately-aggressive investment for your child’s first 18 years. You would amass a pot of money that your adult child could use to buy life insurance on himself when he has dependents to protect.
Of course, this blog post is far from comprehensive and doesn’t touch on the myriad of obscure scenarios that may influence the decision to acquire life insurance in these examples. Instead, my only aim is to encourage people to think about life insurance in the proper light.
The bottom line is this: life insurance is important if you need to replace lost income in the event of the income-earner’s death. If no one would be impacted by the loss of that earned income, I would question the need for obtaining or maintaining life insurance coverage.
What are your thoughts about life insurance? Are you an insurance minimalist?