This is the fourth post of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about. You can read the first, the second and third posts of this series by clicking on the links.
The title of this post is a little misleading. I’m not against life insurance. I am against it in certain situations, however.
I have some friends who are going to have a baby. I’ve dubbed him Financialuproar Junior, but for some reason his parents aren’t in favor of that. I wonder why? If his brother and sisters are any indication, he’s gonna turn out to be a great kid.
My Grandmother recently had a trip to the hospital. Luckily, they figured out the source of her heart problems and they have her back on her feet. By the time this is published, she should be just about back to her old self again.
My buddy recently split from his wife. He purchased a term life insurance policy paying a lump sum to his kids if he dies. He also has life insurance that pays off his mortgage.
My friends in example #1 have been told to purchase a whole life insurance product for their baby. The dad’s friend, (!) who doubles as his financial advisor, is claiming that it’s not just an insurance product, it’s also a savings vehicle for the little guy’s education. I assume everyone knows that whole life insurance is terrible, right? If not, just read this.
(Whole life insurance is the product that combines insurance with an investment product. Term life insurance is just insurance, for a predetermined amount of time, say 20 years. Just wanted to clear that up if you were confused.)
That’s poor financial advice in two ways. 1) Never insure a liability and 2) Never combine investments and insurance. Even though the little guy is going to be as cute as a button and bring his parents all sorts of joy, the fact remains that he’s nothing but a financial liability. Financially, his parents are better off without him. That’s why they shouldn’t insure his life.
Even if my Grandmother from the second example was broke, buying insurance on her life would be pretty silly. Her kids are all grown, even her grandkids are mostly grown. The only expense her death would incur is a funeral. If you wanted, you could have a pretty frugal funeral. Or she could start saving for it. Or her kids could each scrape together a few thousand bucks if they wanted something extravagant. There’s no reason for her to have life insurance.
How about example 3? At first glance, my buddy seems to be doing the right thing for his kids. If he dies, they’re absolutely set financially. I’d argue that he’s actually over insured. If he dies, his now paid for house can then be sold and the proceeds given to his kids. That amount of money would be plenty to pay for their education and still give them a reasonable amount of money to give them a head start as adults.
Figuring out how much insurance someone needs is tough. First you have to figure out what you’d like your family to have if you do die, then you have to figure out what products are best at accomplishing that goal. I’m not going to tackle that issue today; I’ll leave that up to a good insurance broker. What I can tell you though is this: before you buy insurance for yourself or a loved one, take a objective view of whether anyone is actually financially affected by your/their death. If the answer is no, then save your money. Don’t listen to that fear mongering salesman.