This article was sponsored by SelectQuote, but all thoughts and opinions are my own.
Life Insurance: A “need”? Can’t it Wait?
If you are on a journey out of debt, or you’ve set your sights on financial independence, you already know that the more you can live below your means, the more abundant the fuel powering your move forward. So frugality is key. Cutting out purchases that fall into the “wants” category; hunting for bargains when it comes to “needs”; choosing to wait instead always buying NOW . . . These are the action items that combine to create a frugal lifestyle, and they allow financial goals to become reality.
So the question of life insurance can be annoying. Yes, it’s one of those things that has to be taken care of by anyone with dependents. No, nobody wants to leave their spouse or children in desperate straits. “But is it really a need?” the frugal type might ask. “And can’t it wait?”
Dave Ramsey, author of The Total Money Makeover, champion of frugal living for debt-freedom and financial independence, has an answer to those questions as he spells out money myths and money truths. “Myth: I can’t afford insurance. / Truth: Some insurance you can’t afford to be without.” If you have dependents (and in some cases, even if you don’t), life insurance is a need, and it can’t wait.
Term life insurance vs. Cash-value (or permanent) life insurance
The range of options in life insurance can be confusing and intimidating. Investopedia provides some clarification:
“Whole life, variable life and universal life are all types of cash-value life insurance. Cash-value insurance is also known as permanent life insurance because it provides coverage for the policyholder’s entire life. The other major category of life insurance is called term insurance, because it is generally in force only for a period of 10 to 30 years or until the policyholder cancels it. Cash-value insurance has higher premiums than term insurance because part of the premium pays for the death benefit coverage and part of it goes toward the policy’s cash value.”
The frugal choice? Term
It might seem desirable to have coverage provided for your entire life, but for most of us, it’s not necessary. Especially if you’re on the road to debt freedom and financial independence, you won’t need coverage for your entire life. The “cash” part of cash-value life insurance might also seem desirable. Why not save for retirement while paying life insurance premiums? The answer is because you’ll get a far better return on your investments and you’ll pay far less for your insurance premiums if you keep your insurance payments and your savings separate.
SelectQuote Life is America’s #1 independent term sales agency, in business for over 30 years, and according to its website, term insurance is the best option if :
- You have dependents who need to be provided for.
- You want to keep your life insurance costs to a minimum.
- Your need to replace a stream of income or cover a debt is temporary, even if it might be long term.
When you’re in the middle of paying off debt and investing in retirement savings, it might not feel like a “temporary” endeavor, but it is. As Dave Ramsey sees it, if you become debt-free and invest with vision, “when you are fifty-seven and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured. That means when your . . . term is up, you shouldn’t need life insurance at all.”
What length of term?
In deciding upon the length of the term for your life insurance coverage, consider the following:
- How old are your children?
- At what age will they be responsible to meet their own financial needs?
- What is your spouse’s income?
- How much have you already saved for retirement / financial independence?
- In what year do you expect to be retired / financially free?
“Things change!” you might say. And it’s true that the unexpected happens. Job loss, unanticipated expenses, special needs of family members, divorce – not to mention job promotions, unforeseen side income, an inheritance . . . It’s impossible for people to state with certainty what their financial projections are. According to SelectQuote, “Reviewing your policy once every five years is a great way to ensure that your life insurance is keeping up with you.” So start out with whatever projections your current situation indicates, knowing that there will be flexibility to accommodate any changes over time.
What dollar amount?
When choosing the amount of coverage you want, take into account the answers to these questions:
- How much debt are you carrying?
- How much money will be needed to allow your dependents to continue at the same standard of living?
- What future obligations (for example, your children’s post-secondary education) do you want to provide for?
According to Investopedia, “you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% . . .” SelectQuote provides this calculator to help you determine how much life insurance coverage to choose.
The time is now
One of the top 10 reasons why people don’t buy life insurance is that it makes them think about their mortality. There’s no gentle way to put this: At some point, you are going to die. And while we all hope it won’t be for a very long time, there is no way to know when it will happen. If you have dependents, you’ll need to provide for them whether you’re there or not.
The frugal option is term insurance – for a “temporary” need until you are self-insured. And though nobody on the road to debt-freedom and financial independence wants another line item on the budget, if you have dependents, life insurance is a need that can’t wait.