Is It Better To Buy Life Insurance or Fund Your Retirement?

An Important Choice- Buy Life Insurance

WHICH CHOICE IS BEST FOR YOUR SITUATION?

 

There is only so much money to go around right?

We all have things competing for our hard-earned dollars. Often we have debt, medical expenses, food, shelter, kids, and a hundred other things that all require some amount of money to keep them afloat.

But when it comes to protecting yourself by buying life insurance or funding a retirement that is 30 years away, the decision on which is choice makes more financial sense deserves some deeper thought.

 

Buy Life Insurance Or Invest For Your Future?

 

If you have kids, a spouse, a mortgage, or other financial commitments you need to ensure that money is available in the event that you unexpectedly die. Where would this come from? Well, a life insurance policy is the best choice if you are under the age of 50 and don’t have liquid money to cover your debts and care for your loved ones.

Perhaps the best way to consider the need for life insurance is actually based on your age. For this reason we will go through some typical stages of life, and determine what if any, life insurance should be purchased.

You are in your 20’s: This is a care free time of life when you are likely concentrating on getting an education and advancing in your career. The chances that you have people who rely on you financially (kids or a spouse) is lower during this stage of your life. Your need to buy life insurance is very low at this stage of the game. If you do need coverage, you should be able to buy a term life insurance policy with a 15 to 20 year term for very cheap.

You are in your 30’s: During this age you are likely taking on more of everything – debt, a spouse, kids, a mortgage, etc. If you have small children you will want to make sure they are taken care of until they are at least 18 so this would mean buying a 20 year term policy.

You should also consider the costs of your lost income, the kids education, and possibly paying off your mortgage. This would mean buying a term life insurance policy 15 to 20 times your current annual salary.

The good news here is that you are still relatively young and the price you will pay for your policy will be reasonable. Of course this assumes that you are in relatively good health and are a non-smoker. As you know, being a smoker can increase the cost of your policy almost by a factor of two.

You are in your 40’s: Here is where things get a bit tougher when deciding between investing in your retirement or deciding to buy life insurance.

At this point in your life you hopefully will be making a comfortable salary, your mortgage balance will be dropping, and the kids will be getting a bit older. Retirement is drawing nearer and so the lure of investing for retirement is much greater. Also, to buy life insurance at this age tends to get more expensive and your options for longer term (20 year) policies start to dwindle.

You are in your 50’s: In my opinion, this is where the balance between retirement and insurance switches. Why? Because at this point in your life the kids are grown (or close to it), you hopefully have your debt and mortgage under control, and have some money put away.

Also, the cost of buying a good life insurance policy is rising and is much more expensive than it would have been if you purchased in your 30’s. This is the age where you likely will want to lean towards investing for retirement. However, all of our situations are different so be sure to think your own needs through before forgoing coverage.

You are older than 60: When you reach your 60’s your need for buying life insurance has likely passed. The kids are grown, you have definitely reached an age of retirement, and your nest egg is adequate.

Hopefully no one is depending on your salary to take care of them and therefore your need for life insurance is minimal at best. Add to this fact that after the age of 60 life insurance starts to become very expensive for less and less coverage. In my opinion, and in most circumstances, the costs far outweigh the benefits of buying life insurance and you should focus on saving more for retirement.

 

What Type Of Life Insurance Should You Buy?

 

When you decide whether or not to buy life insurance you will be faced with a decision: To buy term or whole life insurance. There are pros and cons to each so here are some further details on each of these types of coverage:

Term Life Insurance: This is the simplest coverage available. Your purchase coverage for a set amount of money, for a set amount of years. For example, if you decide that you need a policy that will cover your life for a period of 15 years, the policy will pay out in the event that you pass away within those 15 years.

You will likely pay monthly, semi-monthly, or annual premiums for this type of policy. Also, you will need to decide the coverage amount because it will be a set payout. For example, you could have a $250,000 term life policy that will pay that amount in the event of your death during the policy period.

A good rule of thumb (although all scenarios are different) is to buy a life insurance policy that is equivalent to 10 times your annual salary.

Whole Life Insurance: For most buyers of life insurance this type of coverage can be very confusing. Simply put, whole life insurance stays in effect for your lifetime (as long as you pay your premiums). Unlike a term policy, whole life is often used as an investment vehicle as they do accumulate a “cash value” over time. When you pay your premiums on a term life policy, the money goes directly to the insurance company and you will only see that money back if you die during the policy period.

Whereas a whole life policy takes part of the premiums and places them into an account to accumulate value. For the vast majority of people who want to buy life insurance, a term policy is a better fit.

There are definitely situations where a whole life policy might make sense, but those are few and far between. To be honest, the fees and commissions that are associated with many whole life policies make them an unattractive option for buying life insurance.

So after all is said and done, when deciding between investing for your retirement or making the decision to buy life insurance, much depends on how old you are. If you are young person with few obligations or an older adult reaching the age of retirement, then investing should be your top priority.

However, for those in the 30 to 45 year old range, purchasing life insurance would likely be the better choice assuming you had dependents and other financial obligations.

What are your thoughts?

Would you rather invest your money or spend it on a life insurance policy?

Post Contribution: Jason Hessom is the founder of FinancialSumo.com which is devoted to helping people get their financial lives in order. Whether by saving money, making smarter investment decisions, or creating a side hustle to earn extra income, you can learn more about Jason here.

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Mr. CBB
Mr. CBB was born and raised in the United Kingdom who then moved to Canada where he is a permanent resident. He recently became a father to a very busy toddler who allows him to be a kid at heart. He bought his first house at the age of 21 after University and his second at the age of 24. Both Mr.CBB and his wife are Debt and Mortgage Free and they did it all in under 5 years using a Budget. Canadian Budget Binder is a place where he shares their financial experiences with his readers and hopes to learn about theirs. Welcome to CBB!
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Comments

  1. I am Planning to Buy life insurance and my age is 28 and i am working as a developer so is this the right age to buy insurance or should i wait till 40

  2. My dad started my life insurance policy (whole life) and I don’t it complicate or confusing. Personally I feel term life insurance is a waste of money. I bought my daughter’s life insurance policy when she was a month old as it was definitely the best time before her lifestyle and possible health issues (if applicable) become an issue. I’ve added more life insurance to my portfolio and I’m in a position that should anything happen to me, with that money and the remaining amounts will cover any foreseeable future events without my daughter needing to cover any bills.

    • Hi Dee,

      Its OK, but we definitely have a difference of opinion. For me, I think term life insurance is what most people need. The only exception would be if you are a very high wage earner, have maxed out any employer sponsored retirement, plans and have excess cash. Then and only then, would I consider a whole life policy. Also, I wouldn’t buy a baby life insurance because really, what’s the use? If something crazy happened and she passed away (very unlikely) is the money from the policy really needed? I am a believer in using insurance to replace income and nothing else.

      Again, just a difference of opinion but thank you for putting yours here.

      Jason

  3. Chrsitine Weadick says:

    We have never had insurance other than what hubby’s work provided. He had back problems years ago and there were issues getting insurance for a loan, so he has always been gun-shy about insurance.
    Our daughter got insurance a few years ago and the company questioned why she wanted it at her age, late 20’s. When you are a single mom it makes sense for her as she has sole custody. The less said about his father the better……

    • Hi Christine,

      Your daughter did good by getting insurance in place for her child. That way in case the unexpected happens your granddaughter will have something to fall back on. If it was a group policy though her employer I would be surprised if they asked “why” the insurance was needed. To be honest, I’d be surprised if a broker asked that question. Stranger things have happened I guess.

      Jason

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