Life insurance is such an interesting product (and a misnamed one too—although I appreciate that “death insurance” might be a harder sell).
It’s such an adult thing to have, like a couch you didn’t get secondhand.
I was first introduced to the importance of life insurance when my dad died when I was 15. Without the money from his insurance policies, we would have been in the suds for sure: as an elementary school teacher, my mom made about two-thirds what he did as a factory maintenance worker so getting by on her salary alone would have been tough.
My experience illustrates how critical life insurance is when a primary wage earner dies young without a lot of savings built up, leaving behind dependents.
But what if you do have savings built up, or you aren’t leaving behind dependents. Do you still need a policy?
A recent conversation with a friend got me thinking about the need for single people with no children to maintain their policies. She was almost apologetic when she admitted she hadn’t gotten around to buying life insurance beyond what she had from her job and was surprised when I just shrugged.
While life insurance seems like something every “responsible” adult should have, for some, it just may not be necessary.
What is Life Insurance
Very simply, life insurance pays out when you die (hence the comment above about it being misnamed). If you live, no one receives anything. If you die, your beneficiaries receive the face amount of the policy (but usually not the face amount plus the amount you paid in premiums).
Policies may have specific rules that apply in the case of a suicide, accident, or if the insured was murdered. For example, in the case of a suicide, the policy may have to have been in force for at least two year prior to the death for the policy to payout. Read the policy to learn the specifics.
How Much Does it Cost
Life insurance companies have to be profitable to stay in business so their goal is to collect more money than they pay out. They do this by using lots and lots of data that predicts when you are going to die and then use that prediction to determine your premium.
If this sounds morbid it’s because it kind of is. It helps if you think about it as them betting on you living to a certain age instead of dying at a certain age.
The lower the likelihood that you will die while the policy is in force, the less you will pay in premiums. If there is a high likelihood, you will either pay more or the company will deny you coverage.
Who Should Have Life Insurance
I can’t provide a one-size-fits-all answer to the question do single people need life insurance because of how important it is to look at the specific circumstances of the individual. Two things I encourage people to consider is 1) who would be affected financially by their death and 2) to what extent would these individuals be affected.
For example, I don’t have any dependents relying on me for food, shelter, education, etc. However, I have helped my sister out on occasion, and have contributed to my niece’s and nephew’s college funds. If I were to die tomorrow, I would want to make sure there was money to continue this support.
Does this mean I need life insurance? Not necessarily. As mentioned in Being Single is an Asset When Saving for Retirement, my net worth is in the low six figures. If I have enough saved to equal what I would want them to receive at my death, there is no need to buy insurance. Instead of paying that monthly premium, I can add it to my savings.
Don’t Forget the Costs Associated with Someone Dying
In answering question #2 above—the extent to which your dependents would be affected financially—don’t forget to back out the costs of your funeral and of closing out your estate.
Funerals can be costly and in their grief, your family may end up agreeing to pay for things you would never have wanted them to pay for (which is a great reason to leave instructions in a will).
The funeral homes I have interacted with over the years were staffed by caring people but that doesn’t mean they didn’t try to up-sell me on certain items. I can’t tell you how many times I declined to upgrade to a more expensive visitor sign-in book when my mom died but it was at least three.
I knew from my experience following my dad’s funeral that it was highly unlikely I would ever go back and re-read that book (apologies if anyone reading this wrote a thoughtful note in it). The funeral home could have used toilet paper as far as I was concerned so no, I wasn’t interested in upgrading.
Probating the Estate
Once the funeral is out of the way, there are the costs of opening the estate and transferring your assets.
Consider: Does the state in which you live have a particularly costly process? Do you have a lot of items that will need to be probated? Do you have a small business or other holdings that will increase the difficulty of transferring the property? Will your executor incur travel-related costs?
If these expenses are likely to eat up all of your savings, it may make sense to buy a policy to cover the cost of them.
If You Do Buy Insurance, Buy Term
Generally, life insurance is either term or whole. Term life insurance is for a particular period of time, such as a ten year or twenty year policy. Once the term ends, the policy ends too and if you are still alive at that point, the insurance company will have collected your premiums for all those years and never had to pay out a dime (this is similar to having car insurance and never having to file a claim because you didn’t have an accident).
With whole life insurance, some of the premium you pay is stored as cash value that you can either cash out or borrow against. This may sound attractive but the premiums for whole life insurance are much, much higher and the amount that accumulates over time is only a small fraction of what you pay in premiums.
In her book, How to Retire with Enough Money and How to Know What Enough Is, Teresa Ghilarducci gives what I think is the best analogy I have ever read for sticking with term life over whole life.
“Unfortunately, [whole life] is not a good investment, because the product is inflexible and the fees are high. If you’ve ever tried that peanut butter and jelly that comes in the same jar, and didn’t care for it—well, this is pretty much the same. Insurance and investments work better when they’re two separate things.” (You can read my full review of Teresa’s book here.)
You will likely be much better off buying a term policy and investing the difference in premiums in a low-cost index fund.
Through my work, I have a policy that will pay around twice my salary if anything were to happen to me. This is a term policy, in force only while I work for my employer.
Up until about three years ago, I had a second policy in addition to my work policy that would have been sufficient to cover the costs of my funeral and closing out my estate. The premiums were about $18 a month and because they were so small, I hadn’t given much thought to whether the policy still made sense for my circumstances.
After calculating my net worth and estimating the costs associated with me dying, however, I realized that I didn’t need that policy anymore and cancelled it.
If I were to leave my employer, I might consider once again getting a small term policy but I am not sure. It will really depend on the amount I have accumulated by that time and the life circumstances of my sister and her family.
Do You Have Life Insurance?
What do you think: do single people need life insurance? Do you have life insurance? Let me know in the comment section below!
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