There are two reasons you should have life insurance.  Personal reasons and professional reasons.  If you have family who depend on you for income, you need it.  If you own a business, you need it.  But there must be an “insurable interest” on the insured.  So sorry, but you can’t take out a policy on the neighborhood junkie hoping to cash in when they cash out.

If you’re a single person and you don’t have any dependents, you don’t really need a policy.  But if you are pretty young and healthy and plan to have a family eventually, you can lock in a low rate by buying now.

Life insurance is meant to replace future income.  So if you’re twenty five and making $100,000 a year, you would want a policy worth a couple of million dollars.  This allows your family to continue paying the mortgage, day to day expenses, college fees, all the things the deceased would have paid for.

If you’re young, you can buy a cheap term policy. By the time you reach fifty five or sixty, you should have built up some assets.  When the policy expires the rates will increase but if you’re healthy you can renew the policy and you’ll need less coverage than you originally bought.  If you’re in poor health, it’s cheaper to convert the policy a few years before it expires to a permanent policy.

Whole life insurance is much more expensive then term.  If you buy term, you should use the difference to invest and you will come out ahead.  A whole life policy is appropriate for people who have a lot of assets and whose family would be responsible for a lot of estate taxes.   Whole life can also provide some yearly income.  After about ten years, it breaks even so the money put in is equal to the value of the policy.  After twenty or thirty years, you can arrange for a yearly distribution and withdraw money.  The return isn’t huge, about 4-5%.  It should be considered protection and not a large source of income.

Liran says that for 95% of us, an inexpensive twenty or thirty year term policy is sufficient. If you are the bread winner for your family, life insurance is a good investment.

Show Notes

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