Life insurance is one of the most dynamic and frequently discussed financial assets on the market. But if you are an individual who is trying to be frugal, it can be difficult to commit to making monthly payments for an investment that is not going to pay off for years down the line.
When it comes to asking the question “should I buy life insurance?”, there isn’t a single answer that can be justly applied to all people. The bottom line is, life insurance makes sense for some people and it doesn’t make sense for others.
Whether or not it is right for you is going to depend on your current financial situation and your long-term financial goals.
What Are The Basics Of Life Insurance?
When you purchase car insurance, home owner’s insurance, or any other type of insurance, you are willingly surrendering a little bit of money each month so that if something were to happen to these things that you value, you will be able to replace them.
Your life is obviously not something that can be replaced. In fact, it can sometimes seem rather morbid to even try to assign it a value. But the purpose of life insurance is essentially the same as any other kind of insurance.
If you were to prematurely pass away, life insurance is a way that you can ‘provide’ for your family in the way you would have if you had been able to keep working.
Some people think of life insurance as ‘income insurance’. They view it as an investment that can either go one of two ways.
Either you will be able to work throughout the course of your entire life and constantly be providing for yourself and your dependents, or you will pass away prematurely and still have a way to provide them with the income that they have become dependent on.
Certain life insurance policies accumulate a ‘cash value’ throughout the course of your life, where even if you do not pass away prematurely, you will have saved up a sizable amount of money you can have access to later on.
Other policies will only cover your life for a given amount of time, and though these policies do not have the same benefits as the ones accumulating cash value, they are generally much cheaper.
Life insurance policies are usually pretty flexible and able to adapt to the monthly needs of most families. Though they will not provide you with any sort of tangible financial benefit for years down the line, they can provide you with a sense of financial security between here and there. For some people, this makes life insurance a worthwhile investment.
How Do I Know If I’m Eligible For Life Insurance?
Compared to some other types of insurance, life insurance is something that is fairly easy to acquire. However, there are a number of factors that can affect how much you will be paying each month, and it is important to keep these things in mind when you are shopping around.
- How old are you? The younger you are, the more life you have left to live, and therefore life insurance is something that is relatively inexpensive (monthly) for young people.
- Do you have any risks associated with your health? If you have certain chronic diseases, you may end up having to pay a higher monthly premium (these vary by company so you are going to want to check).
- Do you have any risks associated with your lifestyle? If you regularly engage in activities that increase your risk of dying early, you are also likely going to have to pay a higher monthly premium. These activities include smoking, flying airplanes, certain extreme sports, and several others.
- What kind of life insurance policy are you hoping to obtain? There exists a vast variety of life insurance policies that you will have to choose from. The kind of benefits and protections you are hoping to get will directly affect how much you pay each month.
If you are young, healthy, and safe, you are very likely going to be able to find a life insurance plan that is able to fit your monthly budget. But even if this is not the case, there are still a lot of options that are available to choose from.
What Is The Difference Between Term And Whole Life Insurance?
There are two main categories of basic life insurance plans—term life insurance and whole life insurance. The primary difference between these two categories, as the names might imply, is that the former will insure you for a give term and the latter will insure you for your whole life.
Term life insurance is by far the most basic, but also, by far the most affordable. With a term life insurance plan, you simply pay a monthly premium (determined by the factors mentioned above) for a given term and receive an associated amount of coverage in exchange.
Most term life insurance policies last for 10-20 years. But they are available for pretty much every length of time.
These policies are often favored by parents with children who want to pay as little as possible each month, but still want to assure that in the event of their early death, their families can still be provided for.
Depending on your age and the amount of coverage you are seeking, some life insurance plans can cost less than $10 per month. However, for those who are willing and able to pay more each month, whole life insurance may be a more feasible option.
With whole life insurance, your premiums will certainly be much higher. But the benefits of the coverage you receive will also be much higher in return.
One of the good things about whole life insurance is that from the moment you qualify, your policy will last you the rest of your life. If you purchase while you are young, you can lock in the lowest monthly premiums.
As time goes one, whole life insurance policies will create a ‘cash value’ that will continue to grow each year at an exponential rate. The longer you keep paying into your whole life insurance policy, the greater the cash value will become.
One of the things that many people like about having an accessible cash value is that if they encounter unexpected financial distress they will have something they can borrow from immediately.
Sources of financial distress can come from a car accident, medical bills, mortgage increases, and several other unexpected events. While term life insurance policies can provide families with security, whole life insurance policies can provide families with both security and equity.
What Are The Risks Of Buying Life Insurance?
Life insurance policies are generally considered to be a fairly safe investment by most financial advisors. Many of the companies that dominate the industry have been in the business since the 1800s, and even those that are newer are unlikely to not be able to follow through with paying out a policy.
This being said, the rewards of purchasing a life insurance policy are not without risk. Every financial investment you could possibly make has both risks and rewards, and it is important to consider both before investing.
Though life insurance itself is a relatively safe investment, it is certainly not the most rewarding. The biggest risk of buying life insurance is that you could very likely be bypassing an opportunity to invest it elsewhere.
If you were to take the money you would be paying into monthly premiums and choose to invest it elsewhere, you could usually earn a greater return on investment than you would purchasing even the best paying whole life insurance policies.
Whether you are investing in an index fund, a mutual fund, or real estate, the rewards from a typical life insurance policy are relatively modest.
Now, obviously, this rule of thumb is not something that can apply to ever financial situation. If you are considering investing, you should look at all of the possible options available and consider things for yourself.
If you are considering life insurance, realize that you are giving up some amount of potential rewards in order to reduce the amount of potential risk you are inheriting. For some people, this is a worthwhile exchange. For others, it is not.
What Are Some Ways I Can Adjust My Life Insurance Plan?
Knowing that most investors have a wide variety of financial needs between the status quo and their death, life insurance companies have come up with several different ways you can adapt your policy to your specific financial situation.
- Hybrid plans – these types of plans seek to allow individuals to simultaneously be investing a portion of their portfolio in something riskier while also be investing a portion of their portfolio into a more standard life insurance policy. These policies are great for achieving a balance of risk and reward, though some individuals view them as unnecessarily restrictive.
- College savings plans – these types of plans are frequently purchased when a new baby is born. They allow parents to have part of their cash value delivered when their children go to college, and have the rest of the cash value delivered as normal. These plans are favored by parents who want coverage but are anticipating paying for their children’s college while they are still alive. However, critics will argue that you can potentially earn greater returns on investment by investing the college portion elsewhere.
- Partial term, partial whole – these policies are comparable to the hybrid plans in the sense that they try to utilize the best of both worlds. For parents who want the most life insurance coverage over the next 20 years, but still want to have some sort of coverage (and accumulating equity) that can last their entire lives, these sorts of plans can offer a great compromise.
- Other customized plans – in general, most life insurance companies are going to want to have you as a client. If your financial goals differ from what they are generally offering, most of these companies will work to come up with a unique plan that is able to adapt to your needs. Life insurance is a stable industry that provides financial protection for millions of families. But remember, every dollar you spend somewhere is a dollar that you can’t be spending somewhere else.
When Should I Buy Life Insurance?
Ultimately when it is the right time to purchase life insurance for you and your family is really going to depend upon your specific financial situation.
There are indeed ways you can invest in life insurance and still consider yourself to be a frugal investor. If you are willing to be proactive about your search for the right policy, a good life insurance plan can be reasonably incorporated into almost any disciplined budget.
The first thing you should ask yourself when considering investing in a life insurance policy is who is at risk if I were to longer be around to work? If you do not have any financial dependents, then investing in life insurance simply may not make sense for you.
Even if you plan on getting married and/or having children someday, you would statistically be better off investing in an index fund today and then transferring your capital to life insurance once a dependent entered into your life.
The primary risk of investing in life insurance, is that the reward is often too conservative for many investor’s personal tastes. The return on investment is often something you will not even be able to enjoy in your lifetime.
Even though there is little risk of not getting what you are owed, the immediately monthly premiums cannot always justify the incredibly long delay in returns.
The rewards, on the other hand, are also quite obvious. With the right life insurance plan, you can put your mind at ease. Life insurance can protect your family in the case of a worse-case-scenario situation, and for some people, this is exactly what they need.
Ultimately, it is important to remember that a well-balanced financial portfolio is one that is as diverse as it can possibly be.
Though you probably don’t want to be investing all of your excess earnings into a life insurance policy, you can certainly be justified investing some of your excess earnings there.
If you can begin to establish a portfolio that has many different types of assets—stocks, bonds, life insurance, real estate, cash, etc.—then you will have begun to engage in what most financial advisors recognize as necessary for both security and success.
Thanks for reading and happy frugaling!