To look after a loved one. That is by far the most important reason to buy life insurance. Premature death is not only terrible; it is also costly for those left behind. If the policyholder dies, life insurance pays payments to loved ones.
Nevertheless, with all of the bells and whistles and policy add-ons, life insurance might be perplexing. Despite what you may have heard, it is not suitable for everyone. A policy has constraints. There are better options for people who want to prepare for retirement or pay their child’s education.
Types of life insurance
There are two kinds of life insurance: term life insurance and whole life insurance. Most people will be content with a simple, low-cost term life insurance coverage that expires after a predetermined length of time.
Entire life insurance policies have additional benefits. They build up monetary value that can be used to make up missed premium payments or as an emergency fund, among other things. They’re massive and widespread, and they can live for a very long time.
Regardless of whose policy you choose, there are three reasons why you should not purchase life insurance this year.
1. To replace stock investments
On average, stocks outperform entire life insurance policies. The average yearly rate of return on a whole life policy is roughly 1.5%. Historically, investing in the stock market has produced a 10% average annual return, which is more than five times the return on a costly life insurance policy.
An insurance coverage is not a suitable substitute for stock market investment.
The finest stock brokers charge cheap costs. Excellent IRA accounts provide tax benefits to retirees. Even a safe high-yield savings account gives better returns than your standard whole life insurance policy.
2. To fund a child’s education
If you’re thinking of obtaining an expensive whole life insurance policy so you may borrow against it to support your kid’s school, think again. Money you borrow accrues interest. Better alternatives exist in general.
Instead, consider forming a tax-advantaged 529 account. Alternatively, put the money in a flexible high-yield savings account. You’ll probably get a better return on your investment.
3. If you have little to gain from a life insurance policy
Some people feel envious because they have little to gain by purchasing a life insurance policy. The following is a list of possible candidates:
- Your family can easily afford funeral costs
- You have sizable assets
- You have no debt or dependents or financial obligations (like co-signed loans)
If this is the case, you probably have nothing to gain from getting a life insurance policy. If you want to buy one for peace of mind, consider a simple, low-cost term life insurance policy that expires when your dependent is no longer reliant on your income.
4. You need long-term care insurance
You may decide that the money you’re spending on life insurance would be better spent on a long-term care insurance coverage at some point.
If you require assistance with daily functions such as eating and dressing, this sort of coverage can help pay for nursing homes, assisted-living facilities, or home health care. These costs are often not covered by health insurance.
If you intend to purchase long-term care insurance, do so before you develop age-related health issues that could raise the cost of the coverage.
If you need help deciding if you need long-term care insurance, consider consulting with a fee-only financial advisor who will not direct you toward an insurance firm with which he or she is affiliated.
Life insurance has one job
Life insurance, according to financial guru Dave Ramsey, has one purpose: to replace lost income. Dependents rely on caregivers to provide food and shelter. For most caregivers, this entails getting a term life insurance policy from one of the top inexpensive life insurance companies available.
When in doubt, consider whether you’re buying life insurance to replace lost income. If not, chances are there are better places to invest your money, including the stock market, a savings account, or a tax-advantaged 529 plan.