It doesn’t get much more adult than buying life insurance. Coming to terms with your own death is a rite of passage as we grow older, and purchasing a life insurance policy is a sign that you care about what happens to your family after you’re gone.
But sometimes, it’s also a waste of money.
Accepting the reality of your own mortality and looking to protect your loved ones after you die is noble, but the funds you would spend paying for a policy can often be put to better use.
Life insurance has a very specific function, financially, and it often just doesn’t make sense to pay for it if you’re not at a certain stage in life. Imagine paying for car insurance when you haven’t even gotten your license – that’s the kind of situation many people put themselves into.
If you’re wondering whether or not it’s financially sound for you to purchase a life insurance policy, read ahead for more information.
During a staff meeting at my recent summer job, a parent brought up the idea of buying life insurance for her kids. I was confused. “Isn’t the whole point of life insurance to replace someone’s income?” I asked. But she disagreed.
Most of the parents in the room said they had bought life insurance for their children, in case something happened. But buying life insurance for your children, who don’t provide any financial value, is a waste of money.
Think about it: life insurance should prevent a family from having money problems if one of the earners dies. Since children don’t bring in any money (unless your kid is a famous child actor), your income would stay the same in the event of their passing – and your expenses would decrease. It’s also incredibly rare for a child to die before the parent, especially in their youth, so the odds of actually benefiting from a policy are extremely low.
Instead, you’re better off saving any money you’d pay for life insurance in an emergency fund, which will cover any potential funeral expenses. You can also put that money towards a college fund.
Most financial experts, including the legendary Dave Ramsey, tell people to buy term life insurance instead of whole. Whole insurance bills itself as a life insurance policy combined with a savings account.
They claim that a user can build up cash value in his or her policy that the family can redeem once they pass away.
Because a whole life policy is designed to cover the customer for their entire life, it’s much more expensive than a term life policy.
For example, when I input my information into a life insurance form, it tells me I qualify for a 25,000 Rupees /month term life policy with a 5 million rupees payout. A whole life policy with the same benefit would cost 4500 Rupees /month.
If you invest the 4,000 Rupees difference every month in an index fund earning 7% annually, you’ll have 1,011,550.80 Rupees (and quite possibly way more) in 40 years, or more than double the cash value of the whole life policy. Plus, you’ll have access to those funds any time – no waiting for an insurance company to pay out.
“On a long enough timeline, the survival rate for everyone drops to zero.”
The above quote from Chuck Palahniuk’s short novel, “Fight Club”, made by his unnamed protagonist (played by Edward Norton in the later film adaptation) always springs to mind when I think about life insurance. We are all mortal and most of us are aware of it, even though it is not something many of us necessarily get a chance to think about so often in our busy, task-orientated, target-driven, fast-moving lives – other stuff always gets in the way. Moreover, none of us really want to think about our own death. It is often seen as morbid and some people feel that by the very act of even talking about their own death, it somehow brings that final day closer!
Is Life Insurance a Waste of Money?
The answer to that question really depends on your situation and whether or not you believe your family deserves to be looked after financially in the event of your death. There are many people who believe life insurance is a waste of money or unnecessary and I’ve often heard it disparaged as “something that is sold and not bought.” I believe that some types of life insurance may be inappropriate, over-sold or even mis-sold, but for the majority us with dependents, a simple term life insurance policy is a very useful and necessary financial planning tool that enables us to fulfill our obligation to protect our loved ones.
Yes, it may seem like a waste of money paying a premium if you never make a claim, but that is the nature of insurance – it’s about peace of mind and covering your bases.
If you’re still not convinced about the need for life insurance, ask yourself a simple question: “If I die tomorrow, would that negatively impact on anyone I care about financially?” If the answer is, “Yes”, then you need to look at taking out a policy to cover that event. Life insurance is really one of those things that you should not procrastinate over, not just because it leaves your loved ones vulnerable, but also because the older you get, the more expensive it becomes and taking out an insurance policy when you are young allows you to lock in lower premiums.
So don’t delay – act today!