Buy Life Insurance Today: Life Insurance Is Stupid Cheap! -Action Economics

Nothing saddens me more than when I hear of people who pass away without life insurance. Life Insurance is an absolute necessity if anyone depends on your income. If you have a spouse or kids, you need life insurance. It’s up there in importance with food and shelter, because life insurance is what will pay for the food and shelter if you are gone. A death of a father / mother / spouse is devastating, the situation is significantly worse if all household income disappears and now there are $5,000 to $10,000 of final expenses. Life Insurance is extremely easy to get and is ridiculously inexpensive.

Life Insurance Is A Necessity:

I’m raising two kids whose mom died. Mrs. C. and I receive a small Social Security check each month for the boys based on her work record. These checks are around $400 each per month. Their mom died at 21 and with a short work record, their Social Security benefits were fairly low. You don’t want to rely on the government to take care of your household. It is important to calculate your Social Security benefits that your family would receive if you died, but it should be in addition to, not replacement of life insurance.

I know we don’t like to think about dying, but it happens, we all just think it isn’t going to happen to us. I had a friend in his early 40s die in a house fire. Another friend of mine who was in his 20s with 3 young kids died in a car accident on his way to work one morning. A good friend of ours who was in her late 20s and a mother of 6 died with 5 of her children in a fire. Tragedies happen all the time and we don’t get to pick when and if it will happen to us. Life Insurance is the best gift you can give to your loved ones and it needs to be done TODAY, because tomorrow is not promised.

Online Life Insurance Is Really Easy:

Last year I got a new life insurance policy through Haven Life. It took me under 10 minutes to apply for it, then I had to drive to a local testing center, do a drug test, blood sample, blood pressure, and a few other quick tests. Less than an hour of my time provided my family with $500,000 if I die in the next decade.

Life Insurance is Stupid Cheap:

When Mrs. C. was pregnant with our son I bought a 20 year $500,000 policy while my income was around $30,000 a year. The policy cost $22 a month and expires in 2028. I picked up a 15 year $500,000 policy last year for $16 a month through Haven life because I felt under insured with 2 more kids and over twice the income. Effectively I am paying $38 a month for $1 million in life insurance.

I just ran a quote through Ladder Life and it looks like I can get a $2 million 10 year policy for $40 a month. Doubling my coverage for only a 5% increase in cost is a no brainer.

Life insurance costs have been on a steady decline over the past 30 years as life expectancy has increased, competition has increased, and regulation changes have altered reserve requirements.

Go With Shorter Terms:

I originally went with a 20 year term for life insurance because I wanted protection for the entire time I would be raising a child. This is not the most efficient way to buy insurance because the further out the term is the more expensive it is. The risk and therefore cost of life insurance is much higher for years 11-20 than for years 1-10, likewise for years 20-30. The cost for me for a $2 million 10 year policy is $40 a month, for a 20 year policy it increases to $67 per month.

Since we know the first 10 year cost is $40 a month, We know that the 2nd 10 year chunk is $67 a month for the 2nd 10 years, PLUS $27 a month for the first 10 years. Effectively by getting a 20 year policy you are buying a 10 year policy for $40 a month and tacking on a 10 year policy at the end of it for $94 a month, not even factoring in the time value of money.

What are the odds that 10 years in the future life insurance will be 2.35X as expensive?

The Sweet Spot For Term Life Insurance:

The sweet spot for life insurance is a $2 million policy, here’s why: There is a fixed cost to writing an insurance policy that is the same regardless of whether it is for $250,000 or $5 million. There is a significant discount for the next step up in life insurance up to $2 million. From there, it is bulk priced and each incremental increase is linear. For example, when I ran the numbers for myself, a 33 year old male non smoker in excellent health, I had the following results:

$250K policy: $12/mo = $48/ $1 million
$500K policy: $17/mo = $34/ $1 million
$1M policy: $26/mo = $26/ $1 million
$2M policy: $40/mo = $20/ $1 million
$3M policy: $54/mo = $18 / $1 million

Each subsequent million after $1 million was $14/mo.

How Much Life Insurance Do I Need?

You want to be able to replace your income. If the money were to be invested in stock mutual funds and your family took a 5% withdrawal each year, you would want 20X your income. If you earn $50,000 a year, that’s $1 million. If you also want to cover college costs for your kids, do some legacy building or donate to charities, add those numbers on top of your life insurance policy.

At an absolute minimum, if money is really tight, at least get a $250,000 policy (generally the lowest they will write) to get you started. You can come up with the $12 a month for this, even on a really tight budget and that $250,000 can still go a long way if you were to die. If you go this route, make a commitment to increase your income and upgrade to a 20X income policy within a year.

Buy Life Insurance Today:

No procrastination, no excuses, no “I’ll get it next week”, do it right now. It takes less than 10 minutes to apply and the follow up health screening can be done at your house or at a local testing center and takes well under a half hour. You have the time, make it a priority and get insured today. Good comparison sites are Ladder Life, Haven Life, and Zander Insurance.

How much life insurance do you have, do you feel like you have enough?

Matt says:

October 23, 2019 at 5:03 am

John,
I fully agree with what you have said, and I can easily understand how passionate you are about it, given the amount of tragedy you have seen around you. I do think you missed one point when talking about the length of term needed: if you are striving for FI, you will soon be effectively self-insured. And as you have your resources building up, you will have less of a gap to cover to financial independence. So, a short term allows you to adjust your coverage down as your resources go up.

This is less applicable, say, for your rental properties, which require work to manage, unless you either did or had a plan to be able to hand them over to a management company. But with the common FI approach of simple index mutual funds, this should be sustainable for one person who loses a partner, without significant cost in time or money to handle them.

To me, this is a specific expression of the type of peace / security / reduction of stress that comes with FI. Even in the dire case of a loss of a loved one, it’s not an existential threat. Until you reach that point, though, it is quite simple to take action to address this risk. What’s interesting is that nobody associates peace of mind with that action–taking the viewpoint of taking care of your family.

John C says:

October 29, 2019 at 7:34 am

Right, A lot of people I talk to avoid the subject because they don’t want to address their own mortality. You are right on the button with the self insured thought, Ideally in 10 years we will be self insured and won’t have a need to reup life insurance again, however because it is such a good deal I think I will reup anyways. If I don’t need it for personal wealth building or generational wealth building, there are some good causes I would like to support with cheap life insurance, one being RIP Medical Debt.

I need to update my Legacy drawer, Will, and plan for rentals. We have switched gears quite a bit over the last couple years and need to get these up to date due to the added complexity. There is certainly a lot more to effective estate planning than just life insurance. Thank you for your thoughtful comment!

Robert says:

December 9, 2019 at 10:13 pm

I definitely agree with you guys about shorter duration terms allowing for planning to be self-insured.

There’s a lot of value in that type of planning.

I also think people can underrate a spouse that stays at home or works part time. Replacing income is often easier math than replacing a whole slew of values around how you raise children or make a family work. Don’t think because there’s no income, there’s no reason to insure someone!

Leave a Reply Cancel reply