I have talked more people out of buying life insurance than the number of policies I have sold. Why? In most situations the cost of life insurance is too high relative to the income or the household budget. Life insurance is a luxury. The cost should not be burdensome. The premiums should not exceed the cost of your mobile phone’s cellular service or a similarly comparable expense you consider indispensable for daily living.
The cost of your life insurance should be an expense that in the worst of financial times, you continue to purchase, like your cell phone service. You can make your own benchmark for the cost of a luxury good you won’t part with. Perhaps it is your weekly mocha frappe chino coffee drink. I subscribe to three different online newspapers and reading them, albeit a luxury, gives me tremendous pleasure. I will cancel my subscriptions to these media sources when money gets so tight, I have to terminate them to pay the light bill.
Life Insurance Premium Payments Should Not Be A Burden
If the cost of your life insurance shoots to the top of the list of expense items to cut during a financially stressful period, that is not good. If you lose your job, you naturally look for ways to cut expenses to conserve cash. This means cutting back on dining out, theater, expensive coffee drinks, etc. If your first inclination is to stop paying the life insurance premium, that means it might have been too expensive in the first place. For most of us, one of the last expenses we will cut is our mobile cellular service, that is how much we value it.
The cost of your life insurance, whether it is a monthly, quarterly, or annual premium, should not be an impediment to living life. It should not evoke buyer’s remorse or feel like a weight around your neck when it comes to paying your bills. From my perspective, it is better to have a small life insurance policy you can afford in the leanest of financial times, as opposed to having a million-dollar life benefit you can afford only when your income is above six figures.
I am not preaching from a sales book. I have life insurance and I have also stopped paying on life insurance policies as I determined I could no longer afford it. I took out my first life insurance policy when I was in my mid-twenties. It is a whole life policy that builds cash value. It costs me $20 per month for a $25,000 death benefit. The cash value in 2020 was around $5,000 and it will reach $25,000 when I am 90 years old. In other words, I’ll be dead before the cash value equals the death benefit and I have to stop making monthly premium payments on it.
$25,000 is not much money, either today, or when I took out the policy. But I wanted it to cover burial expenses – may my family scatter my ashes on a holiday. Hopefully, the death benefit will be enough to pay for the cremation and most, if not all, of the cost for the family to take a nice vacation to toss my ashes overboard on some boat. For $20 bucks a month, I think it is a good deal.
Even when I was unemployed, I never considered cancelling my life insurance policy because it was only $20 per month. Even when I made the stupidest career move in the world – deciding to become an insurance agent – and my income was $0 for years, and I was living off of my retirement savings, I kept the life policy. It was during this time that I got my first mobile phone and had to pay for the monthly cellular service.
I Cancelled My Life Insurance Because It Was Too Expensive
I also had $250,000 term life insurance policy during this period. Seven years into the 10-year term, I just could not rationalize making the policy premiums. I needed that money for other bills. For me, it was more important to pay for my son’s college tuition than the term life insurance policy. It was not an easy decision as I consider myself a very responsible person.
I have quoted some folks life insurance that costs hundreds of dollars per month. Unless you are a high-income earner, a couple hundred dollars per month is a lot of money. It can be better to stuff those dollars into a savings account for a rainy day, than spend them on life insurance. Cash is king. It is better to have cash in a bank account than a paid-up life insurance policy with no cash in the bank.
Everyone’s financial situation is different. Everyone’s sensitivity to current and future expenses, along with the associate anxiety, is also different. We can all agree that there is small probability that we will fall over dead tomorrow. However, modern medicine is very good at keeping us alive, whether we want to live or not. Consequently, most life insurance policies do very little good while you are amongst the living.
Some whole life policies allow you to take a loan out against the cash value accumulated, take an early benefit if you have a terminal illness, and there are viatical settlements where people will buy your whole life policy for a discounted cash amount. There are also complicated life insurance instruments like Universal Life that invest in the stock market. Those are all nice marketing elements, but it doesn’t change the bottom line that if the cost of the life policy is overwhelming your budget, and you have to cancel the policy, then you are without life insurance.
So how much should you spend on life insurance? On the upper end, only you can determine how much you would like to leave as a death benefit to pay off a mortgage, put the kids through college, or allow your spouse a comfortable retirement. Then there is bare minimum life insurance, or final expense insurance, that covers the cost of the funeral and burial.
Consider You Budget For Life Insurance Costs
An important consideration, if we assume that some life insurance is prudent, is how much can you and your household afford for the life insurance policy? For some people, which includes me, I’m only willing to pay an amount equal to other small luxury items. That means paying more than the cost of your mobile phone cellular service may be too much.
And if none of the life insurance policies fit into your budget, then just stick the amount you are willing to spend into a savings account or mutual fund.
If I would have put my $20 per month, the amount I have spent on my whole life policy for the last 35 years, at 1 percent interest, I would have $10,073 in 2020. If I drop dead tomorrow, the policy pays $25,000, which is a good return on the invest, except for the dying part. However, $10,000 is enough to get me cremated and to pay for the family to take the train to the ocean and scatter my ashes.
So, have I talked you out of buying life insurance?