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?
15 Comments
Life insurance (or any insurance) absolutely is a gamble, but a calculated one by the insurers. They have access to years of data that tells them when we’re going to die, on average. They price their premiums accordingly, knowing how much they are likely to have to pay out in claims.
My wife and I have life insurance policies, both term. I find it very difficult to see the benefit to cash value policies. They’re too expensive (premiums)for most famailies for starters, plus the fees are ridiculous, the cash balance accumulates too slowly, and I think traditional retirement accounts offer far superior tax advantaged savings options.
As you can see, I am I biased againsed cash balance life policies. Go with term and invest the difference is what they say. Term policies are so cheap too. For the price of a pizza meal per month you can get about $1 million coverage. That’s impressive!
We have a term policy. This is best for the stage of life we are in right now. Later on once we have more assets build up we will probably cancel it.
I would have to say that for some(most) the life insurance policy would be better simply because it is taken from them on a monthly basis. I lot of people dont even have a savings let alone enough to cover the amount you mentioned. For me I think the savings would work better simply because I am already at the point where savings and paying myself comes first. Like Hunter mention what people spend on pizza they could be covered but the question is will they?
I am carrying my term life policy until I retire and perhaps even longer. Some people drop life insurance when they have enough assets. I view life insurance as income replacement. The premium is less than 1/2 percent of the policy principal. It seems like a good hedge.
My husband and I both have term policies (multiple). Once the house is paid off and the kids are grown up, we will greatly reduce the amount of life insurance we carry though.
We used to have cash-value policies and have switched to term insurance. For our lives, term insurance makes more sense…I don’t have an estate planning need beyond those types of things you described above…so it’s a great fit.
We did term, but we’re going to reassess everything after I graduate and reenter the workplace. I’ve often thought about what you’re saying, though. But if one of us passed away before the final save date, it would be so disastrous. We’re kind of young, too, so it’s really unlikely that we’re going to use ours before the term expires.
@Femme Frugality – I think our “expire” dates are when we turn 80, so we have plenty of time still to reassess the cost and at what point it wouldn’t make sense anymore. For now, I think it still makes sense that we have term life insurance, but I’m the type to constantly question where our money goes and why!
@Hunter – Financially Consumed
Investing the difference is a good idea. I suppose that if I invest the difference in cost, it makes more sense to keep the term policy.
@Miss T @ Prairie Eco-Thrifter
That was my thought as well; at some point I don’t think I’m going to want to continue paying for life insurance. However, if the monthly premium stays low, it might make more sense to keep it.
@Thomas – Ways to Invest Money
Point taken. I think most people don’t have the savings to cover the loss of a spouse or spousal income. At least with an insurance policy, there’s a little cushion there.
@krantcents
At 1/2 a percent of the policy, it is a good hedge. I think mine is more expensive, but not exceedingly so.
@Kris @ Everyday Tips
That’s a good plan. I think that the lower the living costs, the less of an insurance policy you need.
@AverageJoe
When we purchased term policies, it made sense for us as well. It still does, but I wonder if there will be a time when a cash or whole life policy would make more sense, or no policy. My step dad for instance has never had a life insurance policy because he managed to save and acquire quite a bit of assets. So it made sense for him to not have a life insurance policy. I think I need to pick his brain for savings tips! 🙂
I only had the minimum of life insurance when I was single..$250K..which is what my company offered for free as a benefit of working there.
Now that I have kids, I do 10x my salary, so does my husband, plus we have accidental death, long term disability, and an umbrella policy on top of it all. With kids in tow, I now am super conservative when it comes to that stuff. If one of us croaks, the last thing I want to think about is how my bills are going to get paid. It definitely gives me piece of mind even if it’s hundreds a month between all our many policies (car, health, home).