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Wrong Reasons to Buy Life Insurance

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We have separated this topic by age as the reasons to buy life insurance differ by age. In fact, at older ages, you may want to sell your life insurance policy and get a check or monthly income.  For the post pertaining to those age 60+, see "Why Would a Retiree Need Life Insurance?"

The Right Reasons to Buy Life Insurance

Insurance companies and insurance agents will give you all types of reasons to buy life insurance. And most should be ignored.

For example, one reason to buy life insurance might be to pay off debts if you die.  Here's some good news. If you have no dependents and no cosignors, then your student loan, car loan, credit card debts, etc., are all dissolved.  These creditors cannot go after anyone but you and you would be permanently unavailable.

Note that secured debt, such as a mortgage on a condo, is repaid by sale of the condo.

Here’s another reason the insurance industry promotes to buy life insurance. Buy now when you're young because the cost will go up. Check this out.  Here are monthly prices for $500,000 of life insurance (healthy male, 20-year term, fixed price for 20 years)

Age 26  $20.33
Age 36  $23.19
Age 46  $54.46

In other words, if you buy at age 26, then you have a guaranteed rate for 20 years of $20.33 per month. But if you wait to buy until age 36, then you will pay a monthly fixed rate of $23.19 for the next 20 years

So between the ages of 26 and 36, there is almost no change in the premium. The cost of waiting to buy is almost nothing. However, after age 36 to age 46, the premium more than doubles.

Reasons to Buy Insurance -- Term vs Cash Value

The other thing agents and insurers will tell you is to buy cash value life insurance. They say this will help you build savings for the future and have a retirement asset.  That is stupid advice and is the way the insurance industry tries to position life insurance as an investment (which it’s not).  Because the life insurance industry loses a lot of dollars to mutual funds, 401ks, etc., they try to position life insurance as another investment alternative.

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There is however a good reason to buy life insurance of the cash value variety.  While the premiums are higher today on cash value life insurance, the premiums will remain level for as long as you keep the policy (there are exceptions to this that are beyond the topic of this post).  If you have term insurance, it gets very expensive in your 50s and 60s and difficult to afford.

If you purchase cash value life insurance now, that $20.33 monthly premium for term insurance would jump to $143.83. But, the premium on the cash value life insurance will still be $143.83 at age 70.  If you try to get term insurance at age 70, it will be $434 per month (if your health qualifies you to be insured).  Therefore, if you have dependents today and you plan on having them for the next 50 years, cash value life insurance (also called permanent life insurance) makes sense.

Most Important Reasons to Buy Life Insurance

Here’s the main reason to buy life insurance when you’re young.

If you have dependents or co-signors of debt, then you don’t want to leave them holding the bag if you die. In such case, you are plain selfish not to buy insurance.

Sure you feel invincible and the chance of you dying is small.  But tell that to the 30-year-old who got hit by a bus and left a wife and 3 kids with no income. If you ask his family, they don’t glorify the dead guy for his financial acumen.

So if the above does not apply to you (i.e., dependents or co-signors), then there’s no rush to buy life insurance.

However, be careful of how you think about life insurance.  You may think in terms of probability.  The chance of you dying in your 20s or 30s is tiny, right?

That’s a good way for the insurance industry to look at it. They insure millions of lives.  The industry has the “law of large numbers” working in their favor and the probabilities are an accurate measure of their risk.

But you are just you.  So forget probabilities. You will either die or you won’t. You cannot assign any probability to a sample of one. When someone dies without life insurance, the family acutely understands that probabilities don’t matter.

Bottom line: the reasons to buy life insurance are essential for the conditions described above.  It’s just a cost of being a grown up.  To get quotations on life insurance, order this booklet will also be able to get individualized quotes.

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