Life Insurance…Do I Really Need It?
by Jacob Brown
In March of 2018 my wife and I had just become homeowners for the first time. Once we closed on the house, we decided to go out for a round of golf to celebrate. We checked in, paid our greens fees and were making our way to the first tee box.
After we tee’d off on the second hole we pick up our bags and started to walk on the fairway when an all too familiar sound of “FOUUUUR” came bellowing down the fairway from behind us. At the same moment a sound like a gunshot cracked just above my head, a golf ball ripped into a tree right above us missing us by inches.
This had happened many times before, but never when we had a mortgage to pay. What if that ball hit one of us and we couldn’t just walk away. We both depended on each other’s income. What if one of us couldn’t work, or even worse…
I started looking at my options to make sure if something happened to me, my wife would be able to carry on and not have to bear the burden of our newfound mortgage…beyond our emergency fund.
Life Insurance had always intimidated me. Complicated products with slick agents left me distrustful of the industry. Not to mention, do I really need it?
I’ve since become an investment advisor representative, but back in 2018 this was how I thought through my conundrum:
Option 1 – Universal Life Insurance:
- Provides flexible premiums and adjustable death benefits.
- Cash value grows based on interest rates set by the insurer, meaning… that the cost you pay monthly (the premium) can be adjusted so you don’t always have to pay the same rate month to month.
- Adjustable death benefits means that the value the beneficiary takes can vary depending on how much the premium is you pay and what the cash value is. As you can imagine, the more you pay the more your death benefit can be.
Option 2 – Whole Life Insurance:
- Offers fixed premiums, a guaranteed death benefit, and cash value growth…
- Meaning that all the premiums you pay are fixed, but that you will have a guaranteed dollar amount as a death benefit but that with time the cash value grow
- You can borrow from the cash, but if you don’t pay it back there are penalties
Option 3 – Term Life Insurance:
- Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years.
- It generally has the least expensive premium to pay and is good for those that have a financial obligation, like a mortgage or income replacement during working years.
- Term policies do not build cash value, and the death benefit is only paid if the insured dies during the term.
Option 4 – Self Insure:
How about no life insurance at all? I would just actively save and put those funds in a high yield saving account or in a personal investment account. This way I know I can have it when I need it. But if I had the money to self-insure the mortgage, why would I have taken out a mortgage to begin with?
So, here was my thought process: a big death benefit sounds great for my kids, but what if I need or want to tap into that money at some point without having to borrow from my insurance plan? What kind of returns am I forfeiting by locking up a big initial premium and then a monthly premium if I self-insure. How long is that going to take?
My Decision:
I decided to go with a 30-year fixed term policy and that I’d invest the difference. This means that I pay X amount per month and I get the peace of mind that if one of us passes, the other doesn’t have the burden of carrying our mortgage. This then leaves 10-15% of my income available for investments into my retirement accounts. As far as death benefits and cash values go, I’d rather keep my investments in accounts that are liquid, and in a place that no insurance company can tell me what I can and can’t do.
Other Opinions:
How to Use Life Insurance as a Financial Asset | J.P. Morgan
Life Insurance as an Asset: How It Really Works
Important Information
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
