• Matt Morizio

Who really needs life insurance?


You never know how or when you're going to go...

Does everyone need life insurance? Do only parents need life insurance? What type of life insurance makes sense?

Here’s a good rule of thumb when it comes to life insurance: if you are going to leave someone(s) on the hook with a huge financial burden when you die, or if you want to make somebody super rich if you die prematurely, you should consider life insurance (LendEDU does a nice job of explaining it here.).

I’m a parent of five with kids ranging from one to six years old. I have $3.5M in term insurance coverage and my wife has $1M.

If we died tomorrow, someone would be taking on five kids. They would need a bigger home and a bigger car. My mortgage would need to be paid off. They’d be feeding five teenagers and possibly helping with college for five kids. They would need every bit of that money.

But let’s fast forward twenty years. God willing, my kids are grown and (maybe) out of the house. College is done or mostly paid for. My house will be paid off.

I will have earned more, invested more, and will be in a completely different financial position.

I probably won’t need much life insurance at that point because I won’t leave anyone with a bunch of bills if I die.

So, contrary to what you may hear, not everyone needs life insurance. On top of that, those who do need insurance should most likely buy a term life policy.

Let me give you a real life client example:

Male in his early 30’s

In great health, non smoker

Married with one child

Owns rental property

Invests in a retirement account

An acquaintance of his worked for a large life insurance firm, and at the time he recently had his first child (he has two now). Figuring he needed life insurance, he visited his friend.

He walked away with not one, not two, but three life insurance policies:

A 10 year, $600k term policy for $41.80/month

A $100k whole life policy for $164/month for 27 years

A 20 year, $1M term policy for $93.50/month

Totals: $1.7M in coverage that costs $299.30/month.

That doesn’t include the policies sold to his wife…

Now let’s compare his three policies to one 20 year term life insurance policy for a 32 year old healthy male.

**Quick note - insurance companies charge based on the health of the individual they are insuring. If the person is super healthy, they are less likely to die prematurely, which means the insurance company probably won’t have to pay out the death benefit. Thus, the healthiest people receive the best rates. The older and less healthy you are, the more you pay for coverage because your chances of dying increase, which means the chances increase for the insurance company to lose money on you. Hey, that’s business.**

Back to the example…

Conservatively, let’s assume he receives the second best health rating and will pay the annual premiums accordingly. Thanks to Tim Gibson for pulling these numbers for me:

$2M, 20 year term coverage for a 32 year old male, non smoker will cost $88.67/month.

Think about that, for $900k extra coverage (remember, $600k of his death benefit ends after 10 years), he pays about one third of what he currently pays per month.

He has other investment vehicles. He doesn’t need the investment or cash balance component of the whole life policy, and that $100k death benefit won’t even make a dent in future payments if he died tomorrow.

So why was he sold it? Plain and simple, the whole life policy paid a higher commission to the insurance agent.

In our opinion, an insurance should be an insurance, and an investment should be an investment. When the two intertwine, as in a whole life policy, the objectives get blurred, and you wind up with lackluster results on both insurance coverage and investment performance.

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Investment advice offered through Beck Bode, LLC, a fee-only Registered Investment Advisor in the Greater Boston area.