As a young adult, spending money on something with no return can feel wasteful, but I can assure you the belief that life insurance is a waste of money is far from the truth.
Until you near retirement age, it’s really difficult to think about planning for the future. It’s easier (and more fun) to live in the moment and not worry about what’s to come. But, when it comes to discussing if life insurance is a waste of money, the topic gets even more stressful to talk about.
If you think talking about getting older and after work is hard, try talking or thinking about passing away before you expect to. But nevertheless, this is something that everyone should be considerate of as you progress through life.
What is Life Insurance?
Let’s start with the basics before we decide if life insurance is a waste of money or not; let’s understand what it is. The simple definition: life insurance is a contract between you and an insurance company that involves the exchange of premium payments for coverage that will pay out money to a beneficiary after your death.
Now there are a ton of different variables to calculate on the premiums and death benefit payment in life insurance, but there are two different types of policies I want to cover today that you should consider as you start this process.
Term Life Policy:
When looking for life insurance, most folks go the route of term life. This type of coverage provides a benefit for a certain amount of time, and if you pass during that term, the death benefit would pay.
Typical increments of term life are 10, 15, 20, 25, or even up to 30 years. Term life is popular because the rate is often cheaper at an early age because the risk to the insurance company is less. Oftentimes in a term policy you are able to renew at the end of coverage, but at a higher rate because of the increase in your age.
Whole Life Policy:
Just as it sounds, a whole life insurance policy will cover you for the duration of your life and offers a fixed death benefit at the end of the policy. The value of the benefit typically will have a guaranteed growth rate tied to it, and the dividends earned can be used to reduce the premium.
There are other types of life insurance policies that will cover you for the duration of your time here, but whole life is the one I want to focus on today. Because at some point it is guaranteed to pay a beneficiary (unless the policy is void by cause of death), the premiums for a whole-life policy are often substantially higher than term life.
However, if you start your policy early, you can lock into a rate that is grandfathered in and can be a huge benefit down the road.
Again, it’s never easy talking about the future, let alone planning your death. I get that, but if you are the primary provider for your family, it is something you must consider. Now that you have a better understanding of what life insurance is and the different types of policies, let’s dig deeper into whether life insurance is a waste of money or not.
Is Life Insurance for you?
As with anything, everyone is different when it comes to life insurance. I struggle to say I don’t recommend life insurance for everyone, but there are certain circumstances where I would highly recommend it vs. saying you should probably have some type of coverage.
If you are married and have a family, no matter your financial situation, there is no reason that you should not have life insurance. Even if you pay thousands of dollars over years of your life, the peace of mind of knowing that you are covered if anything ever happened to you outweighs the cons.
It’s far too easy to sit back and say, “nothing will ever happen to me, I don’t need to worry about life insurance”, but we all know someone in the last 12 months that has died tragically and left a family behind.
My family is the perfect example. I am the primary income provider of my family and my wife stays home with our two kids who have yet to start school. I have very little debt (only a mortgage), but if anything happens to me, I need to be able to supplement my income for her for at least five years as she figures things out.
We also have a policy on my wife. She doesn’t work, but if anything happened to her, childcare would cost me over $1,000 a month per kid, which I wouldn’t be able to afford. My point is a lot of these little costs that you may not always think about add up quickly and could be a real burden if you don’t plan accordingly.
Remember, not only do you need to think about your children by the means of a life insurance policy now, but you also need to think about the future. I have a large enough policy that if something happened to either my wife or I, my kids’ educations would be taken care of.
I hate to compare life insurance to a savings account, but there are some similarities. Some people are only comfortable if they have 8 months of spending with no income available in their savings, others are fine with $10,000 that can get them through a tough period if needed.
To think life insurance is a waste of money is a bit crazy to me, but I will agree that the amount you take out depends on how much you want to be covered if something were to happen to you.
When is the Right Time for Life Insurance?
My recommendation on when to consider life insurance is the first time you take out your first big debt. Now, it could be an expensive vehicle, but I’m really referring to your first mortgage that may be with a significant other.
My personal belief is that I never want to leave any of my debt for someone else to take care of. So, when I was 25 years old and bought my first house, that is when I took out my first life insurance policy. The loan amount was only $120,000, so I took out a term policy for five years and $200,000 at the time. Because of my age and health history, it cost me less than $20 a month for that policy at the time.
So, do the math on that. $20 per month for five years comes out to $1,200 total spend on that policy. Yes, it’s true, I never needed to use the policy so some might consider it a waste. But when you think about the burden I could have left behind on my parents or fiancée at the time, the minimal cost was worth it to make sure I had everything covered.
So even though you may be wasting something, to say life insurance is a waste of money doesn’t sit well with me. Think about a time that you paid rent during a 12-month lease and then left and got nothing back in return. I know you had a home during that year, but you still just paid money and got nothing back. Life insurance is a fraction of the cost and provides a different type of peace of mind.
For me, the next time I bumped up my term policy was when I got married. At that time, we both worked, but again, I wanted to make sure that the house was taken care of. We also both had car loans that would have been outstanding.
Then the next step that I took was once we had children. I utilize life insurance offered through my job, but also have a separate whole-life policy that will cover me for the rest of my life. So, I may be spending a little bit of money each month for protection, but I certainly hope each day that I never have to use it.
Why is Timing Everything?
Another reason to start thinking about life insurance sooner than later is timing can be extremely important. Hopefully, by now the belief that life insurance is a waste of money has left your head, and you’re now turning your gears on when to buy it.
Life insurance isn’t just a fixed cost depending on what type of policy you want and how much coverage; there is a lot more to it than that. Term insurance is going to be less expensive because there is much less risk of paying out, but these other issues would be a major factor as well.
Age is a big one. The younger you are, the cheaper the rate may be. I get it, paying less for longer or more for premiums in a shorter period is a simple math problem. But most of the time, getting grandfathered in at an extremely young age will end up saving you money in the long run.
Here is another great example: my father started a 30-year term life policy on me when I turned 20 years old. I did all the bloodwork and he locked me into an extremely cheap rate because of my age and health. He paid that for me for the first five years and then handed the policy over to me. Because that policy was started when I was so young, I get that rate until I’m 50 years old. I didn’t do the exact homework on how much it saved me by starting at age 20 compared to age 25, but a friend of mine who sells life insurance said it’s easily a few hundred dollars per year.
We’ve grown up being told not to treat anyone differently, but that’s not true in life insurance. Statistics show that women live up to five years longer than men on average, so that means that a premium for a female is typically less than a male.
The last two big ones are health and lifestyle. To get a life insurance policy, you typically will have to go through routine health examinations where they test your general wellness. The younger and healthier you are, the cheaper the rate. Unfortunately, if you have a criminal past or a dangerous hobby like skydiving, your premiums for life insurance are going to be more.
The biggest thing I will preach is smoking. I know when I got my life insurance policy at work, it was around $5/month for double my salary, which is a nice deal. My coworker who was a smoker had to pay double for the exact same policy. Life insurance is all about odds, unfortunately, and the lower the risk you are, the less money you will have to pay for coverage.
I know it’s easy to look at yourself and say, “I’m too young for a life insurance policy” or “I can’t afford that at this time”. Trust me, I’ve been there before and part of the reason I enjoy writing these types of articles is to share things that I have learned in the past.
If you are saying you can’t afford a few bucks a month (if you are younger) for a term policy to help protect your family in the event that something happens to you, I would challenge you to sharpen your pencil and find some room in the budget. I don’t want to sound like the “get off my lawn” guy, but I can assure you, life insurance isn’t something you want to wish you had once it’s too late.
I get the thought behind the belief that life insurance is a waste of money. To think about shelling out money each month with possibly no return makes no sense. However, after reading everything above, I hope I’ve brought it to life because it can be so important not only to have it at the end of your life cycle but to have it early as well in case an unexpected tragedy did occur.
Most people will agree that there is nothing more important than family. If you’re willing to do anything possible to protect them, add life insurance to the list. It may feel like nothing, but it could be a savior down the road.