Why buy life insurance?

Over the past few weeks, I've promoted the value of whole life insurance when used appropriately and the risks of the "Buy term.  Invest the difference" strategy.

In this post, I'm going to avoid that issue and simply say, "BUY LIFE INSURANCE!"  I know it's impolite to yell, but given that about 70% of people either have no life insurance or do not have enough life insurance, I wanted to be bold.

So, why buy life insurance or buy more life insurance?

If you are on a budget, and you just want a minimal amount of life insurance, then it's cheap.  If you are a young couple and both spouses work, then both of you should have coverage.  You might have $25,000 or $50,000 of life insurance from your employer, but it's almost never enough.  Let's look at a very simple example.

Even if you only make $25,000 each per year, then that means your spouse would have to find a way to double his or her income to make due.  If you have a family income of $50,000 per year and two kids, you probably aren't saving a lot to begin with.  Some of this depends on your region, but you probably have to be very disciplined to make your budget work. 

It is unlikely that either person would die, if you are in good health, but if you do, what would your spouse do?  Even $50,000 of life insurance through your employer would, at best, cover your funeral and perhaps two years of living expenses.  If you have young children, what happens in year 3?  Even if your spouse was able to cut expenses 20%, the life insurance money would still run out in about three years. 

In such a case, a 25 year old would probably want between $250,000 to $500,000 for at least ten years.  Such a policy would be relatively reasonably priced, but would require some tightening of the budget.  One strategy would be to get a ten year policy and a twenty year policy so that the total would come out to amount required.  It would give the couple the ability to postpone a decision about how much insurance would be needed in the future. 

The risk with buying any life insurance is that you could become uninsurable at any point in time.  This is again not likely, but worth thinking about in any insurance decision, especially for young people buying short term policies.  If a 25 year old relies on a 10 year policy, what would happen if he or she became uninsurable within that period.  Would you really want to be without life insurance from age 35 and up? 

The other factor for those underinsured is that the reason is often that they have a policy through their employer, so they don't think they need life insurance.  What if you leave your employer?  You have nothing and it's possible that your next employer won't have life insurance for you.  So, even if you are willing to take the risk and do not think you need insurance, you could find yourself without any insurance.  Buying your own policy, even a small one, eliminates that risk. 

Another reason often given for not having life insurance is a lack of understanding about life insurance and a lack of trust in the insurance agent.  Some people won't buy online, but they won't contact an agent.  This is a difficult hurdle for many buyers.  The truth is that often a good agent can get rates equal to or competitive with those available through internet search engines.  The key is to find a trustworthy agent that works with reasonably priced insurance companies.  This can be difficult.  Asking friends may be the best way to get this information.  The other factor to consider is that buying through a traditional auto and home insurance company is almost always 30% to 60% more expensive than buying through a dedicated life insurance company.  Because most people are price conscious when it comes to buying life insurance, they should buy through a life insurance agent, not their auto and home agent. 

Life insurance is not something that anyone likes to talk about, but it's important for securing your family as well as your assets.  Life insurance proceeds may be the only way that a surviving spouse can stay in a house or keep other assets.  Given the inexpensive rates for term life insurance, almost anyone can afford some insurance.  For those who have more money to save and put away, a well structured whole life policy or a combination of whole life and term life may be the answer.