Is It Better To Buy Life Insurance or Fund Your Retirement?
Estimated reading time: 12 minutes
Secure your family’s financial future with life insurance. Find out why buying life insurance is a smart decision for your loved ones.
Budget Categories Fight For Our Financial Attention
There is only so much money to go around, right?
We all have things competing for our hard-earned dollars.
We often have debt, medical expenses, food, shelter, kids, and a hundred other things that all require some money to keep us 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 choice makes more financial sense deserves some more profound 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 if you unexpectedly die.
Where would this come from?
Well, a life insurance policy is the best choice if you are under 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 based on your age.
For this reason, we will go through some typical stages of life and determine what life insurance should be purchased.
You Are In Your 20’s
This is a carefree time of life when you are likely concentrating on getting an education and advancing your career.
The chances that you have people who rely on you financially (kids or a spouse) are lower during this stage of your life.
Your need to buy life insurance is very low at this game stage.
If you need coverage, you should be able to buy a term life insurance policy with a very cheap 15- to 20-year term.
Life In Your 30’s
You are in your 30s: 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 ensure they are cared for until they are at least 18, which would mean buying a 20-year term policy.
It would be best to consider the costs of your lost income, the kid’s 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 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.
Related: How Our Life Insurance Premium Reduced After We Quit Smoking
You Are In Your 40’s
Here, things get a bit tougher when deciding between investing in your retirement or buying life insurance.
At this point in your life, you will hopefully make a comfortable salary, your mortgage balance will drop, and the kids will get older.
Retirement is drawing nearer, so the lure of investing for retirement is much greater.
Also, buying 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 it in your 30s.
This is the age at which you likely will want to lean towards investing for retirement.
However, all of our situations are different, so think your needs through before forgoing coverage.
You are older than 60: When you reach your 60s, your need to buy life insurance has likely passed.
The kids are grown, you have reached retirement age, and your nest egg is adequate.
Hopefully, no one depends on your salary to take care of them, so your need for life insurance is minimal.
Add to this fact that after the age of 60, life insurance becomes 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. You purchase coverage for a set amount of money for a set amount of years.
For example, if you decide you need a policy covering your life for 15 years, the policy will pay out if you pass away within 15 years.
You will likely pay monthly, semi-monthly, or annual premiums for this type of policy.
Also, you must 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 buying a life insurance policy equivalent to 10 times your annual salary.
Whole Life Insurance
This type of coverage can be very confusing for most life insurance buyers.
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 get that money back if you die during the policy period.
Whereas a whole-life policy takes part of the premiums and places them into account to accumulate value.
A term policy is a better fit for most people who want to buy life insurance.
A whole-life policy might make sense in some situations, but those are few and far between.
The fees and commissions associated with many whole-life policies make them unattractive for buying life insurance.
So, deciding between investing in your retirement or buying life insurance depends much on your age.
If you are a 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.
Discussion: Would you rather invest or spend money on a life insurance policy?
Please share your comments below.
Thanks for reading,
Mr. CBB
Post Contribution: Jason Hessom founded FinancialSumo.com, devoted to helping people manage their finances. You can learn more about Jason here.
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