Frugal Wisdom → Term Life Insurance

This article was sponsored by SelectQuote, but all thoughts and opinions are my own.

Life Insurance: A “need”? Can’t it Wait?

If you are on a journey out of debt, or you’ve set your sights on financial independence, you already know that the more you can live below your means, the more abundant the fuel powering your move forward. So frugality is key. Cutting out purchases that fall into the “wants” category; hunting for bargains when it comes to “needs”; choosing to wait instead always buying NOW . . . These are the action items that combine to create a frugal lifestyle, and they allow financial goals to become reality.

So the question of life insurance can be annoying. Yes, it’s one of those things that has to be taken care of by anyone with dependents. No, nobody wants to leave their spouse or children in desperate straits. “But is it really a need?” the frugal type might ask. “And can’t it wait?”

Dave Ramsey, author of The Total Money Makeoverchampion of frugal living for debt-freedom and financial independence, has an answer to those questions as he spells out money myths and money truths. “Myth: I can’t afford insurance. / Truth: Some insurance you can’t afford to be without.” If you have dependents (and in some cases, even if you don’t), life insurance is a need, and it can’t wait.

Term life insurance vs. Cash-value (or permanent) life insurance

The range of options in life insurance can be confusing and intimidating. Investopedia provides some clarification:

“Whole life, variable life and universal life are all types of cash-value life insurance. Cash-value insurance is also known as permanent life insurance because it provides coverage for the policyholder’s entire life. The other major category of life insurance is called term insurance, because it is generally in force only for a period of 10 to 30 years or until the policyholder cancels it. Cash-value insurance has higher premiums than term insurance because part of the premium pays for the death benefit coverage and part of it goes toward the policy’s cash value.”

The frugal choice? Term

It might seem desirable to have coverage provided for your entire life, but for most of us, it’s not necessary. Especially if you’re on the road to debt freedom and financial independence, you won’t need coverage for your entire life. The “cash” part of cash-value life insurance might also seem desirable. Why not save for retirement while paying life insurance premiums? The answer is because you’ll get a far better return on your investments and you’ll pay far less for your insurance premiums if you keep your insurance payments and your savings separate.

SelectQuote Life is America’s #1 independent term sales agency, in business for over 30 years, and according to its website, term insurance is the best option if :

  • You have dependents who need to be provided for.
  • You want to keep your life insurance costs to a minimum.
  • Your need to replace a stream of income or cover a debt is temporary, even if it might be long term.

When you’re in the middle of paying off debt and investing in retirement savings, it might not feel like a “temporary” endeavor, but it is. As Dave Ramsey sees it, if you become debt-free and invest with vision, “when you are fifty-seven and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured. That means when your . . . term is up, you shouldn’t need life insurance at all.”

What length of term?

In deciding upon the length of the term for your life insurance coverage, consider the following:

  • How old are your children?
  • At what age will they be responsible to meet their own financial needs?
  • What is your spouse’s income?
  • How much have you already saved for retirement / financial independence?
  • In what year do you expect to be retired / financially free?

“Things change!” you might say. And it’s true that the unexpected happens. Job loss, unanticipated expenses, special needs of family members, divorce – not to mention job promotions, unforeseen side income, an inheritance . . . It’s impossible for people to state with certainty what their financial projections are. According to SelectQuote, “Reviewing your policy once every five years is a great way to ensure that your life insurance is keeping up with you.” So start out with whatever projections your current situation indicates, knowing that there will be flexibility to accommodate any changes over time.

What dollar amount?

When choosing the amount of coverage you want, take into account the answers to these questions:

  • How much debt are you carrying?
  • How much money will be needed to allow your dependents to continue at the same standard of living?
  • What future obligations (for example, your children’s post-secondary education) do you want to provide for?

According to Investopedia, “you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% . . .” SelectQuote provides this calculator to help you determine how much life insurance coverage to choose.

The time is now

One of the top 10 reasons why people don’t buy life insurance is that it makes them think about their mortality. There’s no gentle way to put this: At some point, you are going to die. And while we all hope it won’t be for a very long time, there is no way to know when it will happen.  If you have dependents, you’ll need to provide for them whether you’re there or not.

The frugal option is term insurance – for a “temporary” need until you are self-insured. And though nobody on the road to debt-freedom and financial independence wants another line item on the budget, if you have dependents, life insurance is a need that can’t wait.

Do you agree that term life insurance is both the wise and frugal option? Do you see the need for life insurance as being “temporary”?  Your comments are welcome.

16 comments on “Frugal Wisdom → Term Life Insurance

    1. Absolutely! Of course the hope is that you’ll get through that term alive and well – but it’s still a comfort to know you’re covered.

  1. Yes! Term is definitely the frugal choice. When you view life insurance as temporary, as you explained in the post, term makes complete sense. We purchased a term policy when our kids were very young, and weighed our options by thinking about different scenarios. If one or the other of us were to die, we thought through exactly how much money the spouse who was left behind would need to be financially secure. Our goal was to buy enough coverage to pay off our debt and provide adequate child care for our children, and also have a bit of a cushion for living expenses to ease the stress. Another scenario we ran was both of us dying – we wanted enough insurance to ensure our kids were well cared for without being a financial burden to their caregivers. Now that our kids are getting older, child care is less of a need and our ultimate goal is to be self-insured, so we will need to reevaluate our coverage when our 20 year term policy expires.

    1. You clearly put a lot of thought into your policy, Amanda – and you did well. Maybe you’ll be self-insured by the time that 20-year term is up? If not, it’s good to know you can adjust and carry on. Thanks for your thoughtful comment.

    1. You’ve got that “temporary, but long-term” understanding, Brian. With your kids just starting post-secondary, it’s good to have patience and coverage as you gradually gain a self-insured state.

  2. Great post Fruclassity.

    Too often we bury our heads in the sand because we want to avoid unpleasant thoughts of death. Term life insurance is something that people definitely need to evaluate when determining their families financial future.

    Thanks for posting!!!

    1. Thank you, Mustard Seed Money : ) Nobody wants to dwell upon the possibility of early or unexpected death, but it remains a possibility – and we all have to be covered just in case.

  3. My wife & I have term policy. We purchased a whole policy for our daughter when she was born as it’s only a couple dollars per month and only intended to cover burial & funeral expenses. We plan to open whole policies for our future children too!

    As Brian commented & what Dave recommends, our ultimate goal is to become self-insured. But, that’s a bridge to cross on another day.

    1. I like what you have to say about future children! I’ll be honest though: I don’t understand why a policy is necessary for a child. That’s fodder for a whole post I bet. Thanks for your comment, Josh.

  4. I opened a $1 million life insurance policy earlier this year and I feel so much better having that security in place in case of a worst case scenario. Now we just need to get my wife on a policy and we will be set. I do think you need it if you have dependents, it’s really not something you want to go without.

    1. “I feel so much better . . .” It’s worth it for the practical need for coverage, but just as much for peace of mind. I’m glad you’re set up, DC, and you’ll have double that peace of mind once your wife is covered too : )

  5. We’ve never had life insurance. I think insurance, overall, is confusing and sometimes there is no way to fit it into a tight budget, no matter how good an idea it is. Then by the time you can, it’s easy to forget about it. I think this post is a great educational tool Ruth.

    1. Kay, I wondered if you had life insurance. Thanks for your honesty here! It IS easy to forget about, and it can be confusing – but I believe a life insurance policy must find its place in a tight budget. The key is to find trustworthy people for advice about it.

  6. I agree that term insurance is the way to go. When I hear what people pay for whole life, it’s outrageous! Doesn’t Ramsey advise building your assets in the mean time so that you’ll need less life insurance as you get older?

    1. Exactly. He is all for term insurance too. Savings grow more quickly and premiums cost less when life insurance and savings are kept separate. And if people play it right, they need less as they get older – until they don’t need any at all. You’ll be there long before you’re “older” Kalie : )

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