You’re very right that I’ll be over-insured when I’m 58, but who cares? The fixed payment I send to MetLife is going to be peanuts (thanks to inflation and my vast wealth at that stage in my life) so what does it really matter? The important thing is that my wife and kids are taken care of now when it would be financially (and probably emotionally) devasting to lose me.
Besides, there no such thing as too much money. We can easily afford the payments now, so it’s not a big deal to own term life for us. And, if I die when our liabilities are near zero there are still other things I’m sure my wife would like do with it. Pay for grandkids college maybe…
that’s just my argument. you will have more money by not overinsuring. and your kids will be taken care of. you’re no longer managing risk but speculating on your own death for the benefit of your grandkids.
But what you’re suggesting isn’t practical at all. (Sidebar: this reminds me of the debate between paying down debt that’s charging you a lower interest rate than what you could safely earn. Many people, including myself and CvM, would rather pay off the debt and free up cash regardless of what “the book” says is the right thing to do.)
Let’s take a 30 year old guy with a wife, a kid, another on the way, and they just bought a new house with a 30-year mortgage. Oh, and let’s say he makes $100k a year and he fully expects to be making bank when he’s 50. What term policy should this guy buy? I’d still argue a 30 year term is the most appropriate. If you could tell me with absolute certainty that they’re going to stay in that house for the rest of their lives, have no more kids, never lose his job for an extended period or have to take a significant pay cut, never have to take on a large amount of debt unexpectedly, and/or can guarantee the market doesn’t crash during the ten year period when he’s 50-60; then sure, I’d suggest a 20-year or maybe even a 15-year policy. But you can’t predict any of those things.
^remember too, that all insurance is one year term. If you buy more than one year, the insurance company is going to automatically price in the second year and third year, etc. however, they can’t price in health problems. So barring health problems, there’s no difference between T30 and three T10’s.
That’s a gigantic “if” though. It’s a hell of a lot easier, for most people, to lock in a low premium when they’re in the 20’s or early 30’s and very healthy compared to a 50 year old trying to get a 10-year term policy. Again, in theory there’s not much wrong with going with three 10 year policies. Except that if you really do need that last 10 year policy, things are probably not going great for you and the $600 a year you could have been locked into is now $3,000 a year and you probably can’t afford it.
paying more for term life insurance than you should puts you more at risk in case of disability or job loss. say you do lose your job as you suggested. having to pay an extra $10 or $20 or $30 a month is unnecessary dollars wasted at a time when you need those dollars the most. i’m saying that typically, risk adverse people buy far too much life insurance than they need, possibly at the expense of insuring against the more destructive issue: disability. why not allocate some wasted dollars spent on LI toward DI or CII? at least CII has return of premium.
i’ll put it in CvM terms. if you’re a BSD, you don’t need any longer than t10.
This is exactly why: My wife and I are friends with this older married couple. The guy is in his mid 50’s and the woman is about 45. They’ve been together for a long time, two kids - one in college and the other in high school. He was a day trader and did quite well for himself through the crash but has fallen on hard times these last couple years. They’re in the process of selling their house, probably at a loss, and he’s basically unemployable since he hasn’t had a “real” job in over a decade.
So, why does he need life insurance? They just found out she’s pregnant. Oops. He’s 54 years old or something but on paper he might as well be a 28 year old just starting out.
Five years ago he would have laughed at me and completely sided with you. Now, if he kicks the bucket his wife and newborn are completely SOL. Again, that’s why it’s called insurance. You’re putting too much of an investment spin on things. Sometimes you just pay for peace of mind (like paying down debt even if you - technically - have better options). It’s not the most elegant use of resources, but you’re not going to get hurt either.
The fact is that life in general is uncertain and the future is largely unknowable. Insurance planning is all about managing risk in that the financial risk that death, illness or disability would have on an individual, their family and lifestyle.
You need to consider your current coverage in place (i.e. from work and private) and determine what your overall objectives are. Insurance solutions are very customizable and can be tailored to your specific situation.
The OP may, or may not actually need life insurance right now; we actually don’t have enough information to determine that.
Insurance is useful for a variety of different objectives at each stage of your life. You can use it to provide an estate if you haven’t accumulated many assets to pass along, protect your current lifestyle and income in the event you die too soon, provide funds to provide a continuing income to beneficiaries, resources to help kids fund education costs, funds to pay estate taxes and final expenses etc…
I personally have lots of insurance on the wife so in the event she gets hit by a bus then I can get me a nice trophy wife.
I worked as a IA for a while. Having a chat with 50-60 year olds with not enough insurance because they followed the ‘term over term’ policy was tough. You ever priced out a 10 year term policy for a 60yo person on fixed income? It’s a north of 250$/month IIRC. On fixed income. That’s just term policy. In some cases they are too old to even apply for a longer term.
Sooner or later, everyone gets something and you can’t renew anymore, or the renewal price (without a new medical) is astronomical. You can literally see people kicking themselves from across the table because if they had chosen the whole life 30 years ago instead it would have been paid off by now, and they wouldn’t be having this conversation. In my mind, you can never have enough money for your family. Instead they are shit out of luck, too old, too sick, and too poor. Nobody plans to be 2/3 of those things, but they happen.
Personally, I got a whole life policy in my mid 20s. Payments will be done before I"m 45. I’m a participant in a dividend pool that buys even more insurance or I’ll use my policy as as collateral for a loan when I retire. True, the dividend pool underperformed estimates by a few BPS last year, but I’m in it for the long haul. When I get married, I’ll tack on 20 year Term policy for 500k or so in case I bite the bullet early. Am I over insured? Absolutely - but the cash flow consumed by this product doesn’t significantly impair my lifestyle or retirement plan. In a way, it will contribute to my retirement plan in a passive way. Lock in those premiums early, don’t be those elderly couples who are afraid for their spouses if they die. We can’t all be BSDs.
Of course, there are always different schools of thought. If you think you can save 50-100$ per month and generate higher ROI on a tax-adjusted basis, for 20+ years, go ahead. That’s if you don’t die sooner, and your health is perfect forever. Immunize, my friends.
i really don’t like this argument because it quasi-supports that we should use LI as our ONLY form of risk management. vasectomy anyone? probably the best risk management tool in the book. any man who can still produce offspring at age 50 is an ongoing risk to himself and anybody he cares for. if you’re done having kids, be done. another form of risk management is getting a job with a steady income and solid growth prospects. though nothing is guaranteed, the vast majority on the standard track will do well enough to lower their liabilities over time.
I agree that lots of insurance for those who are vagabonds or aren’t good risk managers with their life in general is probably fine but in most cases, and for most CFAs, I’d argue that the vast majority will only ever need 10-15 years of privately acquired term insurance. most of us will be overinsured anyway by age 40 due to mandatory employer LI, in Canada at least, I can’t speak for the U.S. when it comes to employer insurance.
its easy to say “its better safe than sorry”. its the #1 tagline of the LI industry, and its true, being underinsured early in life is a great tragedy. but as a CFA, you should never recommend “extra” insurance to a client, even if it is a “very manageable” cost.
no 50-60 year old should ever need privately acquired insurance if they are employed and have group insurance that provides 2-3x salary upon death. why would you have liabilities that exceed ~$200k by that time, that aren’t covered by assets? and if you still have liabilities by the time you retire, you’re usually SOL anyway. whole life is not the answer to this. if you’re incredibly risk averse and you are willing to lower the return of your assets overall for that protection, you go t30, but whole life is never the answer as it is far more taxing than t20 or t30 because it includes the cost of insuring years 60-77 (the years after t30 but before your impending statistically calculated death).