Do I Need Life Insurance?

This question has been popping up recently on social media and social circles: Do I need life insurance? Even worse is that life insurance companies and MLM companies that sell life insurance have been popping up around my area. Their aim is to make money off the monthly premiums from unsuspecting clients. And they do this without educating them on whether they need it or not. Although I believe in the merits of life insurance under certain conditions, there are many bad apples in the industry. These bad apples make life insurance look like a scam.

I’m never opposed to learning more about personal finance, so I’m open to listening to your points. However, from a lot of research and my studies of life insurance under the CFA program, the conclusion is that it is basically only beneficial for certain people. Not everyone.

Do I Need Life Insurance For My Family?

Let’s get on the same page. Life Insurance benefits your loved ones after you die. When you did, the payout goes to the beneficiary. In most cases, this is your SO and your kids. I’m going to illustrate this with a few scenarios:

Scenario 1: You’re Young

If you’re young with no family and kids, I suggest you focus on your debts first. Because if you have life insurance and you died now, the payout would go to your parents or SO. Assuming that your parents and SO are working, that means they don’t need¬†your life insurance payout to survive. And if they don’t need it, then you’re better off gifting them a retirement account with less fees than an insurance company.

Scenario 2: You’re Married with Kids. You are the sole income of the household

Realistically, this is where you may want to consider life insurance. If you’re bringing home $5,000 a month to take care of your family and all of a sudden you die, that $5,000 per month disappears. How will your family survive, especially if your kids are too young to work.

Assuming your company has a life insurance policy in place, which most companies do, will it be enough to cover your family until they can get back on their feet?

If you fall under this category, my suggestion would be to determine how much your family would need. What are your annual expenses? Based on that number, find a policy that can cover that, instead of blindly buying whatever the salesman tells you.

Scenario 3: You’re Married with Kids. Both Spouses are Working

Similar to Scenario 2 above. Since both spouses are working, the amount of life insurance you need may be less. In this way, you can probably select a cheaper life insurance policy. Since both spouses might have life insurance already with their respective companies. In this scenario, you may not need life insurance at all.

Scenario 4: You’re Making Baller Money

This is a rare scenario, but very possible. You’re making a lot of money each year. You’ve maxed out your 401(k) and have done a back door conversion to your Roth IRA. You need somewhere else to stash away money. And you want to do it in the most tax beneficial manner possible. You don’t want to stick large amounts of cash in a savings account, because inflation will kill your earning power over time.

You are mostly frugal with your spending so you still have another $150k-$210k in savings. So where do you put it?

Many life insurance policies today mirror the market returns, but with a limit. Typically you’ll see a 12-14% annual cap and 0% floor. So if the market is up 25% you only get the cap. If the market is down -40% (2008) the bleeding stops at 0%.

BUT THE FEES!? Brutal. Kinda. Over a 30-40 year period the average cost is .4% – .6% but that only works if you HOLD.

This is why i get so frustrated on these threads. “I bought Whole/Universal Life and blah blah my fees should I quit?” Everyone here is quick to tell people to bail. The only person who wins doing that is the insurance company. They make all their money off the ones who are not disciplined to stick with it.

Where Do Life Insurance Fees Go?

  1. Market Upside – I have now diversified against market risk. Some of my savings are “in” the market and some are “mirroring” the market in a controlled environment that protects my downside.
  2. Tax-Free loans. All the money I take out is now tax free which does wonders with my withdrawal rate. Also instead of taking $100k out of my 401k and being in the $100k tax bracket, what if I took $50k out of my IUL and $50k out of my IUL. I’ve now lowered the tax burden on my 401k distributions.
  3. Tax-Free death benefit. All the while if something were to happen to me my plan is self completing. Term is cheaper. What most people don’t know is that the cost of insurance inside a permanent policy are extremely close to the cost of insurance inside of a term policy. Yes there are additional fees & premium load, but the actual cost of insurance is very similar.
  4. Long-term care benefits. The biggest risk you face in retirement is your health. Maybe you have experience in your family, maybe you don’t. Its devastating, or at least it has been in mine (dementia for one grandparent, stroke for another). Most policies sold today allow you to use your death benefit to pay for care while you are alive aka a “Living Benefit”

So there is an example of where it makes sense for a High Income earner, which is my point all along. Clearly a good idea for someone making $500k.

The actual income threshold for me depends on the age, how much they already have in qualified (taxable), and their commitment to saving.

So Do I Need Life Insurance?

In conclusion, I would check your scenario. If you’re young, check your future plans. Because if your future plans include having lots of dependents, then it might be cheaper to get started now and pay lower premiums. If you’re already married with kids, then check your company’s life insurance policies. Then, determine if you need to purchase more. If you do purchase more, I’d recommend looking into term life insurance first. Lower premiums and you can select what kind of coverage you need.

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