Life Insurance

If you read my post about how I budget, you may have noticed that I have two Life Insurance policies. Well, technically I have 3, since my employer also insures me. There are as many opinions about Life Insurance as there are available policies. Do you need insurance? If so, how much? And what type of policy?

I don’t think there is a one size fits all answer when it comes to Life Insurance. Most financial experts will tell you that you only need Life Insurance if someone else is financially dependent upon you. I take that one step further: You need at least some Life Insurance if there isn’t the cash available to bury you.

I’m single, and I have no children. I have very few debts. But I also have very few assets. I once read somewhere that you should have Life Insurance until you are retired, and have money set aside for funeral expenses. To me, this makes sense. Likely once you retire you no longer have dependents, and are living off of investments, etc. that would hopefully continue to provide income for a remaining spouse. In which case, Life Insurance is no longer a necessity.

I worked very briefly selling Life Insurance policies in my mid 20’s. It was an interesting, eye-opening experience that I might talk about more someday. The company I worked for insisted that all of their agents only sell whole-life policies. These policies maintain a “cash value”, so the owner can cash out the policy if they decide they no longer need it. They were also much more expensive, and offered a terrible return on your investment. They were touted to clients as “maintaining your insurability”. In reality, they are the policies that make the insurance company, and the agent, the most money. In contrast, term policies have a set expiration date. If you are in bad health when the term policy expires, you will likely not be able to get a new policy.

Once I had left the company, I took out a term policy on myself through another company. I selected a 30 year term policy for $100,000. The premium was affordable, and will not change for the remainder of the term. My thinking was simple: Being in my mid 20’s, that gave me 10 years to start a family, and an additional 20 years of coverage while my children were still dependent. With a 30 year policy, I’d “guaranteed my insurability” for the next 30 years, at which point I would hopefully be financially stable enough not to need the policy.

Is $100,000 enough? Well, it depends on what direction my life goes. If I do have children, and am a large factor in the family income, probably not. If I don’t, then it’s probably more than enough. I also have $80,000 of insurance through my employer. This policy will expire if I ever leave the company.

The second Life Insurance policy that I own actually insures the life of my younger sister. I bought the policy around the same time I bought my own. The idea being that, if something were to happen to her, it would enable us to pay off her student loan that I cosigned on, along with paying for her funeral arrangements, and any other financial obligations that would need to be met.

Most people aren’t fully aware of how Life Insurance policies work. Every policy has an owner, an insured, and a beneficiary. In most instances, the owner is the insured, the insured’s spouse, or the insured’s company, but that doesn’t have to be the case. The insured must agree to the policy, but after that, the owner has complete control of the policy. So, for example, let’s say a husband takes out a policy on his wife. The wife must agree to being insured. But once that agreement is met, the wife no longer has any control of the policy. The husband can keep or terminate the policy, change beneficiaries, etc, all without the wife’s knowledge or consent. The wife can do none of those. The husband can even keep the policy after the couple has divorced, for as long as he is willing to continue paying the premiums. For this reason, most legal experts recommend that each person own their own policies.

So, I own the policy, my sister is the insured, and I’ve assigned my Mom as the beneficiary. My sister can’t make any changes to the policy, nor can she cancel it. It’s a 20 year term policy, so after that point the policy will go away. Most term policies have a renewal option, but I would need her permission in order to renew.

Taking out a policy on myself was no big deal; it seemed like just another step in becoming a responsible adult. But I will admit to crying the day I took out the policy on my sister. Considering a loved one’s possible death is difficult under any circumstances. In this situation though, it seemed like admitting that she seemed destined to continue to spiral out of control.

I’m sure there are many people out there who would disagree with my decisions regarding Life Insurance. Some would say my policies are unnecessary, while others would find them inadequate. In reality, you never truly know. The best you can hope for is not to find out. Yes, we all die. Life Insurance is insuring against unexpected death.

What are your thoughts on Life Insurance? What would you change if you were in my situation?

– Cindy W.

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