Unless you enjoy free-soloing like Alex Honnold, your chances of dying are very slim. However, you still need to prepare for this rare but catastrophic possibility.
Who Needs Life Insurance
The purpose of life insurance is to replace your income if you die. Therefore, if anyone depends on your income (usually a spouse or kids), you need life insurance. If you are the breadwinner of the family, you need term life insurance. If you are a stay-at-home spouse, you provide critical income in the form of childcare, cooking, cleaning, etc. so you also need life insurance.
Who Doesn’t Need Life Insurance
On the other hand, if you are single or financially independent, you do not need life insurance. If you’re Alex Honnold, I wouldn’t bother trying to get life insurance because you’re most likely uninsurable.
Stay Away from Whole Life Insurance
It is important to understand that we are taking about TERM Life Insurance here. We are NOT talking about Whole Life Insurance, otherwise known as Permanent Life Insurance or Cash Value Life Insurance. Whole Life Insurance is a complicated investment product with high fees which you most certainly do NOT need and should NOT pursue. I do not want to get into the details about Whole Life Insurance in this post, but for more information please see a great post over at the White Coat Investor.
What You Need to Know About Term Life Insurance
Term Life Insurance is simple and cheap. There’s not much to the policy. If you are dead, your beneficiary gets the payout. If you are alive, your beneficiary does not get the payout.
You want to buy a LEVEL Term Life Insurance policy, which means that your premium stays the same for the term length of the policy.
You should choose a TERM length from 10-30 years, depending upon how long it will take for you to become financially independent. Obviously, a longer term will result in a higher premium. Once you are financially independent, you will no longer have a need for life insurance and can cancel your policy.
You should buy a LARGE AMOUNT of level term life insurance, on the order of $1-2 million. Basically, if your spouse or significant other were to die, you do NOT want to be stressing out about money and the need to work.
The payout on a life-insurance policy is tax-free, so if you have a $2 million policy, you would receive the full $2 million in the event of death, which, if invested prudently, would generally provide $60,000 in income per year for the rest of your life (using the 3% rule).
Consider the Tiered Approach
As your net worth increases, you will have less and less of a need for life insurance. One way to account for this is to buy two policies with different term lengths.
For example, you could buy a $1 million 10 year term policy AND a $1 million 20 year term policy.
In the first 10 years, your policy payout would essentially be $2 million. After the first 10 years (when you’ve saved up $1 million or so), your payout would be $1 million.
How to Shop For Term Life Insurance
There are a variety of sites where you can compare policies from multiple different companies. For example, term4sale.com and qualitytermlife.com.
A healthy 35-year-old male can generally get a $2 million, 20-year level term policy for around $70/month. That drops down to around $35/month for a 10-year level term policy. You’re planning to be financially independent in 10 years, right?
As you can see, term life insurance is relatively cheap, so there’s really no need to go without. And again, once you reach financial independence, you can just cancel your policy.
Bottom Line
Make sure you get life insurance before you die. Like now. You’ll probably never need it, but that’s the point of insurance. Now get out there and go climb some mountains.
Yes yes yes. I’m evaluating term life insurance policies now myself. Anyone who’s leaving behind a family or debt needs life insurance. I think the only mitigating factor is if you’re financially independent and can cover any incidental costs when you pass away. I’m also planning to write a will and living will, too.
Nice Written !!!
Interesting view points. Well written – thank you for the article.