I Have Enough in the Bank. Why Should I “Waste” Money on Life Insurance?
Should you just stop paying for life insurance if you’re doing well financially?
Let’s face it – no one likes to pay insurance premiums. While we may experience moments of gratitude for having health insurance coverage, fire and flood insurance, or car insurance, many people dream about the day when they will finally be wealthy enough to just forget about insurance altogether. After all, if you have enough money in the bank to take care of life’s curveballs, why give any of it to the insurance company?
This line of thinking is built on several misconceptions that could cost your family a lot of money and heartache – even if, today, that family is “wealthy” by conventional definition. Let’s dig into the subject of life insurance and wealth to set the record straight.
Not all life insurance policies are created equal!
First off, an important fact: the words “life insurance” can be used to define many policies that are quite different. To keep our terminology simple and clear, we will group all life policies into two big categories.
Term life insurance policies, as the name would suggest, are sold for a specific term (10, 15, 30 years). If you die during the term of the policy, your beneficiaries will receive the policy payout. If you don’t die during the term, the policy will run out with no benefits paid out, unless you choose to extend. There is one exception to this rule, and that is a “return of premium” term life policy that allows you to get all of your premiums back if you don’t die during the term.
Generally speaking, term life is one of the more economical life insurance policies most people could buy. Even so, it’s important to know that policy costs tend to increase as an individual gets older (especially beyond age 50). Premiums for a “return of premium” policy also tend to be higher than those of a traditional term policy.
In contract, cash value life insurance policies (which include whole or permanent life, universal life, and variable life) cover you for life – no terms limits. These policies have a certain cash value that can be withdrawn or borrowed against. While this may initially look like a good deal, whole life and other similar policies tend to be more expensive than term life insurance plans. In addition to the higher monthly cost, they also involve health exams and more paperwork.
Although your specific circumstances will determine the right choice of a life insurance policy for you and your family, in most cases the additional cost and hassle of getting a whole life policy outweigh its benefits.
And so, for the remainder of the article, we will take a closer look at term life insurance policies and tackle an important question.
Should you just self-insure if you are “rich”?
As with any loaded question, let’s begin by defining our terms.
First, what exactly does it mean to be self-insured? Most people think that if they can simply pay for an expense from their assets, then they don’t need insurance. That view is incomplete.
Consider, for example, a family that owns a $1M home and has another $1M in savings. If that family were to decide that they don’t need property and casualty insurance on their home, they would certainly save some money on premiums. However, if the home were to burn down, they would exhaust their savings to buy another comparable residence. While it’s true that they can cover the expense of a new home out of their assets, it’s hard to argue that the family is worse off for not having invested in an insurance policy.
The second question is, how “rich” is rich enough to truly self-insure? If you sit down and do the math with your financial planner, the number may surprise you. It takes a considerable amount of money to self-insure and not be financially damaged in the process. Remember that not all assets are created the same: a $1M home is certainly an asset, but you wouldn’t want your spouse to have to sell it in order to pay your medical debt after you pass on.
Which brings us to the next point.
What exactly does a term life policy cover?
A term life insurance policy has a pre-determined benefit amount but no specified use for the money. As a result, you can plan for the benefit to cover much more than just your final expenses. Here are some expense categories that could be paid for by a term life insurance benefit.
Funeral expenses. Depending on your choice of setting and ceremony, this could vary from a modest sum to tens of thousands of dollars.
Medical bills. Even if you have excellent health insurance, your final medical bills could rise into tens of thousands of dollars. This is especially true if you pursue experimental procedures and therapies that aren’t covered by insurance.
Other personal and business debts. You family could be left to settle those after you pass on, and a life insurance benefit is a great way to alleviate some of the financial stress.
Estate taxes at the state level. Most people are comforted by the relatively high federal estate tax protection (at the end of 2018, the number stands at $5.6 million). However, that protection is only valid at the federal level. State estate taxes could be considerable, and you need a plan for covering them.
All of the above could be highly relevant for a well-to-do family. A term life insurance policy can deliver peace of mind without depleting family assets and holdings.
Other possible uses of a term life insurance policy are covering mortgage payments to keep the surviving spouse in the family home, or paying college tuition for the kids. These are likely to be a non-issue for high net worth individuals who probably have other plans and savings accounts set aside for those purposes, but they are worth mentioning anyways.
Shopping for a term life insurance policy
In summary, we believe that a healthy bank account should not be a deterrent to getting a term life insurance policy. If you plan to dig into this topic in 2019, here are a few tips to keep in mind.
Read the fine print! This is true of any legally binding document that you sign, and especially so for a policy that’s meant to take care of your family after you pass on. Get the full copy of the contract. Read it carefully, preferably with a financial planner or an attorney who can explain the language and help you understand the policy.
Shop around. Unlike a gallon of milk that costs about the same no matter where you buy it, life insurance policy quotes will vary considerably based on the specifics of the policy and which insurer you choose. It’s wise to request multiple quotes to understand your options.
Research reliability and financial health of the insurance company. At the very least, look at ratings. If you are financially inclined, read financial reports and disclosures, and figure out which re-insurance company would take over your policy in the event that the primary insurer fails.
Choose your beneficiaries carefully. Remember to update the list if your circumstances change. The proceeds from a term life insurance policy can be used in any way that a beneficiary desires! It’s also important to tell your beneficiaries that you have listed them on the policy.
Finally, be truthful on your applications. Insurance fraud is a crime, and a lie on the application could potentially compromise the policy.
If you need help reviewing your options or stress-testing your family’s financial situation to ensure that you are, in fact, as secure as you think, reach out to us at Phillip James Financial