Do I Need Life Insurance?

Whenever I am feeling that it’s about time to write another post but am lacking inspiration, I always think back to recent conversations with my expat friends to help lead the way to my next literary masterpiece.

Little do they know that I use them as guinea pigs in this way, diligently analyzing every word of our friendly chatter for a little spark to get that writing fire roaring.

And so it was that a recent conversation with some close friends over a wonderful weekend meal provided us with our topic for today: life insurance.

What any life insurance marketing magician will tell you is that yes, we know this is a rather delicate subject that is difficult to approach in the best of times, but we all need to address it at some point if we want to ensure that all our loved ones are taken care of in case the unthinkable happens.

Clearly nobody told that to our host, who unashamedly broached the forbidden topic just as I was manipulating a nice piece of tuna sushi from my soy sauce dish to my mouth.

Thankfully, I have years of experience with chopsticks, so didn’t drop it into my drink.

Do I Need Life Insurance?

If this is your only dependent, you probably don’t need life insurance.

And fortunately for him this was a weekend brunch. As we were more than halfway into our meal, we were already well into our personal allocations of grape-based beverages, so nobody seemed to mind; in fact, a rather light-hearted, cordial conversation ensued.

It went kind of like this:

Host: I just bought some life insurance.

Me: (nodding with sushi in my mouth)

Guest’s wife: Well he (pointing at husband) won’t get it!

Husband: Nah, what do I need life insurance for? She has a job if I die!

(whole table breaks out laughing and proceeds to dig into more raw fish)

Now, we are all married couples with primary school kids, so who’s right?

It turns out they both are.

Ask Yourself Some Questions

Do you really need life insurance? Now I’m not a financial advisor (this is the disclaimer here), but I don’t think finding the answer to this question has to be difficult.

Just ask yourself a few simple questions:

1. Am I financially independent?

Yes: I don’t need life insurance. If I am not dependent on a job or anybody else for my income, I don’t need to insure against not having it. The money is already there. Do you think Bill Gates has life insurance?

No: Maybe I need life insurance. It depends on the answers to the next 2 questions.

2. Do I have a spouse?

Yes: You may need life insurance. If your spouse doesn’t work and thus your family is dependent on your income, you probably should have some life insurance. If your spouse is economically self-supportive, you probably do not need life insurance. If you earn less than your spouse and are dependent on him/her, then your spouse needs life insurance!

No: I don’t need life insurance. Unless, of course, I have kids…

3. Do I have kids?

Yes: Maybe I need life insurance if I am not financially independent and my spouse won’t be able to support them if I am not around.

No: I don’t need life insurance.

Done – only 3 questions and you should have a pretty clear answer.

You can see how neither of my friends above were wrong as they have totally different personal situations. Don’t let anybody tell you that “everybody needs life insurance”.

But if the answers to your questions above lead you to believe that you do need life insurance, then the next logical question is “How much”?

How Much Life Insurance Do I Need?

When I wanted to answer this question for myself, there was one primary question that I needed to consider:

How far am I away from financial independence?

Now the answer to this one may be hardest of all, as it is going to take a little bit of analysis of your current and projected future lifestyle. What is financial independence to you?

To me it means that I can live on the income from my savings and investments. If we take that simple definition, then you need to be clear about two figures:

  1. Your living costs for a year
  2. The projected rate of return on your investments

So, if I determine that my family could have all their future needs met with $50,000/year and a conservative return on my investments is 5%, then I need $1 million in income producing assets to be financially independent.

If I currently have, say, $500,000 in income producing assets, then I could buy a $500,000 term life policy. If I want to be conservative, then I could add a few hundred thousand to be on the safe side.

What type of policy should I buy?

I would never buy any other policy than a term life policy.

This type of policy is extremely simple: If you die, the company pays out the amount on your policy.

Term life is the most cost-effective life insurance. I would never buy “whole life” or some other kind of investment linked product.

The companies who offer these products take a huge percentage of your premiums for themselves. Andrew Hallam has a great article about these schemes on his Millionaire Teacher website.

If I want to invest my money, I just use low-cost ETF’s.

So there it is. Just ask yourself a few questions, and you know if you need life insurance and how much you need.

And the bonus? You just learned what your personal definition of financial independence is. Perhaps it’s not as far away as you had thought. Just keep working on saving a higher percentage of your income each month, and you will achieve your goal sooner than you expect.

I hope to meet you there!

How about you? Do you have some insights on or questions about life insurance? Share your thoughts with our community by posting in the comment box below.

Comments

  1. I would also consider whether or not the guardians of your children live in a country where there is good public educations and health. Of course this factors into the “financial independence” calculation.

  2. The big thing of course is that it clears a mortgage, which is the main reason I have it.

    • Yes, thanks for pointing out another important factor in the financial independence equation, Becky. Assets – Liabilities = Net Worth. You need that life policy to cover your liability until it is paid off.

  3. Another important question to ask is, “Who should I buy life insurance from?”

    There are two steps to answering this.

    1) Make sure that you consult with an independent agent. One who can research and sell life insurance from many insurance companies – not just one.

    2) Then buy your policy from the insurance company offering the lowest cost. Caveat: it is important that they all be A-rated.

    Putting it all together. There are many websites run by independent agencies that offer online needs calculators, and that provide instant quotes from multiple top-rated insurance companies. It’s fast, easy, and once you’ve decided on an amount, term, and company, all you need to do is submit a request, online, to get the application process started.

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