When Sarah and I had our first child, we began to think seriously about what would happen if one of us were to die early for some reason.
There are a lot of reasons it can happen: a car accident, a sudden severe ailment, a freak incident. As much as we would like to pretend that we are invincible, the truth is we’re not. Members of the military have special needs for life insurance, which we talk about here.
Hand in hand with that, we need a few other things. We need to maximize our available money right now, when we have three children under our roof, and we also aren’t as worried about having a lot of cash when we retire because we both have strongly-funded retirement accounts.
In other words, like many families, we need inexpensive insurance that will cover the unthinkable right now, but we don’t need a big pot of cash down the road.
For us, and for many others, the solution is simple.
I have a single point of advice for anyone considering buying life insurance for an adult: buy a term policy.
Not universal. Not whole life. Not any other package that an insurance company might put together for you. A simple term policy.
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Why do I suggest this simple rule? There are a few reasons.
First, term policies have the lowest annual cost. If you run into financial trouble, it will be harder to keep putting money into a whole life or universal policy than it will be to put money into a term policy. If you can’t pay, your policy ends (in some fashion, depending on the specifics).
Second, you get the largest death benefit for your dollar from a term policy. If you’re in a situation like I am, where your primary concern with life insurance is that it will take care of your family should something unexpected happen to you, you want to maximize the death benefit for your dollar. Term life insurance is the best policy for that, by far.
Third, you have more investment freedom outside of an insurance policy than inside one. Much of the appeal of other insurance types is that they offer investment benefits. If you want investment benefits, take the difference between the cost of your term policy and the investment-oriented policy you’re looking at and figure out what you would have – no strings attached – after twenty or thirty years of investing that money with a 7% return (Warren Buffett’s annual stock market return estimate going forward).
Term life insurance solves our life insurance concerns and ends up putting more money in our pocket over the long run compared to other options. Sounds like a win to me.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.