Quite a few years ago, Mr. LH and I decided to purchase a term life insurance policy just in case of a sudden accident. It gave us a peace of mind encase either of us were to die unexpectedly. At least with the policy we selected, it was a low monthly cost and paid out enough that one of use could:
- Pay for funeral services. Cost: $3,000 – $10,000.
- Replace the loss of one income for 6-months to a year. Cost: $18,000 – $36,000.
- Take a few months off of work to sort things out and grieve. Cost: $18,000.
- Buy something expensive to make the remaining person feel better (Okay, Mr. LH said he buy an expensive car. I think I’d just visit family members.) Cost: $3,000 – $35,000.
We’re still paying on our life insurance policy, but because it is a term policy we don’t intend to have it forever since term policies don’t have a cash value applied to them. Actually, with a large enough emergency fund, we could budget for the above items over a 10 year period.
If I calculated out the maximum of each of the above items, that comes to $99,000 (just a grand under our policy coverage). Over 10 years, at a 4% compounded savings rate, if I invested $670 a month I’d have a little over $99K saved in 10 years. Now, if all goes well and we’re still kicking (and really, we wouldn’t be that old anyway), we’d have a nice little nest egg set aside for the future. Also, we’d be saving $5,280 in payments in that same amount of time.
So now I ask myself, “Is an emergency fund a better alternative?” It is if I can scrape together $670 a month to only be applied to our “ER/death” fund. This figure doesn’t take into account retirement, travel, or any other type of emergency that I’d need to budget for.
An alternative would be to swap out our term policy for a cash policy, which would mean we pay a higher monthly amount, but have the option of cashing it out in our senior years. This may actually be a better option for us since at this point, we could afford a slightly higher monthly payment. I also don’t like the idea of paying money towards something we won’t ever be able to take advantage of except if one of us dies. We’re sort of betting against death or for death I suppose if we wanted to take advantage of the term policy.
Have you reviewed your life insurance policy? Did you opt for a term policy or cash policy?