How to Spend Money Wisely » Insurance

Not Everyone Needs Life Insurance

Along with emergency funds and online bank accounts, life insurance is one of the most talked about topics of the whole personal finance blog-o-net, a long hyphenated word that I just made up. It seems like every 4th post is a list of the benefits of life insurance, usually with an affiliate link or two, because bloggers gotta get paid too.
I can understand why everyone is so high on life insurance. Imagine you’re a 30-something guy, who lives a pretty normal life. You’re got the average 2.3 kids, along with a wife who only works part time because she’s busy taking care of the kids and the house. You’ve got a mortgage and a car payment, even though you should really be saving up to buy your cars in cash. Basically, if you live a normal middle class existence, you’re pretty much screwed if you kick the bucket. You wouldn’t really care, because you’re, you know, dead. Still, it would be a bummer for your wife.

So, like so many others, you buy life insurance. Because you’re intelligent, (probably from reading this blog) you buy term life insurance, since having insurance attached to an investment product is generally a bad idea. Since everybody already knows that term insurance is best, let’s move on to a slightly different topic, one that’s rarely discussed. There are certain people who shouldn’t have life insurance. Just who are they?

Single, No Dependants

Since you guys clearly care about my life so much, let me give you some more details. I do this under the assumption that none of you will track me down and stalk me. I don’t want to have to get a restraining order. Again.
I’m a single guy, since the ladies keep rejecting my awkward advances. I own a house, along with some RRSPs, individual stocks, and some other investments that I’ll keep vague. If I were to get hit by a bus tomorrow, it would be a bummer for at least a few people. While people would care if I were to die, it wouldn’t affect them financially at all.
I easily have enough liquid cash to cover the cost of a funeral. I have a will, which gives directions on how my estate would be divided if I were to die. I have given power of attorney to the executor of my estate, meaning they could withdraw the cash needed to give me the fancy casket. Hey, I want a comfortable eternity.
The point is, as long as nobody cares financially (that’s the key word here) about your untimely death, then why would you insure your life? To give money to people who either don’t need it or should be making it themselves? I’d argue that’s a pretty poor use of insurance.
Besides, the chances of me kicking the bucket even in the next decade is pretty slim. Because of that, I’d have a pretty small insurance premium. I’d rather pay nothing, and then reevaluate in the future.

Underage Children

This one isn’t as cut and dry as my argument about single, no dependent people, but I still wouldn’t buy life insurance for a child.
This isn’t because I don’t value children. It’s because, strictly from a financial standpoint, they’re liabilities. They eat your food and maybe even drink your beer when you’re not looking, if they’re older kids. While it’s always a tragedy when a young person passes prematurely, it actually lessens the financial burden on the parents. No longer do they have to feed, clothe and entertain the child. The parents would obviously still like the kid around, that much is certain.
There is a legitimate argument for buying a small term policy for a child. Losing a child is a horrible thing that no parent wants to go through. If there’s a financial buffer (provided by insurance) the parents can take a few weeks off work and not have to worry about money as they recover. While I’d rather see someone have enough in savings to get through a rough patch, insurance can serve as a welcome reprieve.

Life Insurance Isn’t For Everyone

For the majority of readers out there, life insurance is a good idea. Even though the event of your untimely death may be unlikely, it’s a good idea to make sure your dependants are taken care of in case it ever happens. The benefits can far outweigh the costs, which is sort of the whole point of insurance.
But, if you’re a single person with nobody to take care of, maybe you should reconsider your decision to get life insurance, at least for a little while.

Comments

  1. Absolutely true, Nelson. Put that money in your emergency fund or travel fund!

  2. John

    Couldn’t you recommend this to young people so they build up the amount and use the amount as collateral when purchasing a mortgage at a lower rate?

  3. JG Larvan

    I agree. Much like an iPhone or an tablet isn’t for everyone. I hope children these days are aware of how much things they are supposed to know before they even think of buying the things they don’t really need. Life Insurance is a big thing for everyone but not everyone should do it. Atleast not yet.

  4. Ethan

    I disagree. I believe that everyone should buy a moderate quantity (say $300k) of 30+ year term sometime before the age of 21. The reason is simple: insurability. Waiting until you have dependents would be smart, if the passage of time wasn’t putting you at risk of high rates or even complete uninsurability.

    Honestly, what should really exist is a product that lets you *reserve* a policy at premium rates until age 30. You might pay merely $20/yr for the privilege of opting for a policy, no questions asked, anytime before age 30. A significant waiting period would be called for before the option became active, of course – probably one year. And many people might just pay a lump sum for this reservation.

    I’d like to be able to buy this for my 4-year-old. What if we find out when he’s 13 that he has a congenital heart defect? What if he has documented depression problems when he’s 19? A severe car accident with surgeries? Such things could make it impossible for him to offset his eventual dependents’ financial risks with an affordable term policy. Hedging against these unlikely situations now should be very inexpensive. Sadly I don’t know of anyone offering such a product. Heck, the policy could even switch from reservation-only to standard-benefit at the moment a dependent was added, with accompanying premium increase.

  5. Glenn Cooke

    Ethan, there’s two ways to cover future insurability on kids. The first is to get a child’s rider on your base policy. Those riders are typically low cost and have the option change to permanent insurance at healthy rates when the kids become adults. e.g. some companies will cover the kids for as low as $5 a month. Second way is to just buy an insurance policy on the children today.

    Most folks that desire insurance on their children are satisfied with one of the above two options. And when one of those options is already at $5/month, not much point in creating a product cheaper than that.

    As for the OP, you’re espousing a common viewpoint that you should probably reconsider if you’re going to speak authoritatively on a subject. You’re suggesting you wouldn’t buy life insurance on a child. I suspect this is speaking from the stereotypical viewpoint of ‘I’m healthy so not interested, I’ll wait until I’m uninsurable before I change my mind’. It’s very much a perceived value issue. If you’re young health and no kids, I agree you may not want insurance – but if you’re writing on the topic pupblicly you should take a more rigourous approach. Because if you had a history of heriditary medical issues that precluded you being able to get life insurance yourself, and had kids of your own, I’d suggest that you’d have written the article from the perspective that readers may very well want insurance on their kids.

    Without even the slightest nod to doing any research on the subject, this is neither a balanced review nor a consumer advocate suggestion. It’s simply an opinion piece from a relatively uninformed author.

  6. Ethan

    @InsureCan: It is true that most life policies have child riders available, and that they are cheap, and it may also be true that they satisfy many customers. However, having reviewed several of them I believe it is perfectly fair to say that they are poor deals which objectively fail to efficiently serve most people’s needs. Generally the child riders on term policies are NOT for term policies, but for various kinds of whole life. They are also guaranteed-issue only at anemic amounts – rarely above $100k, if even so much.

    If these problems weren’t hobbling enough, there is also usually no mention of inflation or cost-of-living adjustments to the guaranteed policy, which is a serious flaw when reserving a benefit that might be paid 50 years in the future. As for simply purchasing a policy for them, that would be a fine solution if you could find terms above 30 years. You can’t (except a very occasional 35 or 40) because of regulations related to cash-value policies. Essentially, once a certain amount of premiums have been paid relative to the benefit, regulations demand that the policy carry a cash value. This makes longer term policies illegal to offer. If you were purchasing a policy at birth, you’d ideally want a 65-year policy. It could have no benefit until dependents arrived, and it could have a benefit that declined as dependents departed or as age began to exceed 50, but nevertheless… a 65 year term.

  7. Ethan

    Oh and also, what sense does it make (product-wise – I know it makes sense sales-wise) to offer these only as riders? What if the parent is uninsurable? What if a wiser grandparent wants to reserve coverage for their grandchild? If anything, a parent discovering they are uninsurable is one of the situations likely to lead to a concern for a child’s insurability.

  8. Glenn Cooke

    Ethan I’m not sure what products you’re reading, but child protection riders are not whole life. They’re effectively ‘term til adulthood’. They’re level premiums that expire when the children reach adulthood. They also have the ability to convert to permanent without a medical exam, typically for some multiple of the original amount of insurance.

    As for being poor deals, an example of pricing from one company would be $5/month for ALL your children for $10,000 of coverage. You won’t get a better ‘deal’ than that.

    All your objections are easily answered just by purchasing an individual policy on the children instead of a rider. Your objection to that seems to be that it has to be a term product that lasts for a long time. A term product that lasts 50 years is simply a permanent product. Don’t get mired in the other details – if you want a really really long term, then just buy a permanent insurance policy. In other words, all of your objections are easily answered simply by purchasing a permanent life insurance policy on your children. If for some emotional reason you won’t buy permanent insurance (even though you basically want the insurance permanently), then no, there is no solution for you.

    However I don’t believe I’ve ever run into a client that didn’t fall into one of three categories when it comes to life insurance on children:
    1) It’s creepy, don’t want it (the majority)
    2) Want a little bit, cheap (buy a rider)
    3) Want to guarantee future insurability, higher face amounts, or as a gift (buy an individual policy, often a ‘quick pay’ so that it’s paid off in 20 years).

  9. Glenn Cooke

    And one point of clarification about child riders. There’s two ways to do that. One way is to have an individual policy on the children that is part of the parent’s policy. Basically a seperate policy, just included in the paperwork and payment along with the parent’s policy.

    The second way, the way that I’m referring to is called a ‘Children’s Protection Rider’ or CPR. This is a specific type of coverage limited to children. Small amounts, easy coverage – typically available only in 5000 or 10000 multiples for easy to calculate amounts like $5/month/unit or $2.50/child/unit. The coverage is level until it expires at adulthood, at which point there is an option to convert it to permanent insurance with no medical exam for some multiple of the original insurance amount.

  10. Ethan

    We seem to be talking past each other, InsureCan. I’m uninterested in “term to adulthood”, because it is insurability *during* adulthood that I wish to protect. As you point out, and as I was originally complaining, if you buy a term policy with a child rider your child will have the ability to convert to a permanent policy upon reaching adulthood – NOT the ability to begin their own term policy. Thus it accomplishes nothing toward the goal of preserving the child’s ability to enjoy inexpensive, high-benefit coverage during the years they need it most.

    A term product that lasts 50 years is not a permament product. It’s a term product that lasts 50 years. A term product at $300k, purchased at birth and expiring at age 50, would cost (if it existed) $20 per month at most. If it was written so that the benefit applied only if dependents existed, then it would be even cheaper, possibly as low as $10 per month. But let’s take $20. Over the 50 years of the coverage that costs the buyer a total of $12,000. They have a benefit of $300k the day they get married, they day they have their first child, etc. What costs would be involved in a permanent policy that provided this level of coverage? You tell me – it sounds like you sell it. But I’m guessing it would cost 5x to 15x as much.

    Insurance companies currently aren’t interested in offering future-insurability products. Where those would normally go, they have replaced them with products that act as feeders into the policies they really like to sell – regardless of whether it’s what the clients need. I don’t really blame them for this: there’s no pressure from the clients for appropriate products because most people don’t think about these things ahead of time. However, the few of us who do have nothing to buy.

  11. Glenn Cooke

    The reason you don’t have a product that fits your needs is because you’re constructing an artificial situation that just doesn’t happen in the wild.

    Yourself excepted, people that are concerned about future insurability don’t want term, they want permanent. You can argue that, but that’s what I see everyday and what I believe the rest of the industry sees. Trying to suggest to most young and healthy people that they should buy permanent is futile – they all want term. Take that same person and make them uninsurable and the last thing they want is term – they almost always want permanent – suggesting term is futile.

    Anyone that’s seeking term for 50 years (this is the first time I’ve ever seen anyone looking for this) just buys permanent. I can’t imagine the difference in price would be noticeable. I’ve never heard someone ask for insurance for their kids that takes them to 65. If they’re buying insurance for their kids past adulthood, they’re always looking for permanent.

    Children that want term insurance when they reach adulthood just buy it. If they can’t due to insurability reasons, then they don’t want term – they want permanent, which the product already lets them purchase, guaranteed. Quite simply, people that are uninsurable don’t want term – again, yourself excepted.

    In other words, I understand your comments, but again you’re describing an artificial construct that in practice, only one person on a blog wants. In reality, the existing options for children’s insurance are already pretty robust.

  12. steven

    Hi… Great post! i like this post very much… Thanks for sharing this information with us…

  13. Brent

    Hopefully Mr. Smith’s views are not shared by the majority. Didn’t notice any designations after his name to give him the credibility. I assume that he also rents his house as opposed to owning it as that’s what he is suggesting when he says that everyone knows term is the best life insurance. It certainly is for the insurance company that takes you money and has no obligation to pay anything after the term is up. while term insurance is an impotant part of a portfolio it should not be the only type of insurance you own. There is a reason the richest people in Canada own permanent insurance as part of thier portfolios, maybe you should find out why instead of simply taking Mr. Smith’s word that Term is the best,

  14. Adrian

    I don’t even need to read the blogger (and keep in mind, I use that term in the full derogatory sense) biography to know 1) he’s not a Certified Financial Planner, 2) He’s clearly commenting on a product he’s not licensed to do so, and 3) he’s commenting about children’s insurance when he admits he has none of his own.

    You don’t get life insurance on children because they’re a financial liability, you get it for the EXACT OPPOSITE REASON. You get it while they AND YOU have the health, since health problems of parents can cause an issue with the child getting insurance. This way the premiums are unbelievably cheap, yet allow for the child when they become an adult to have their own insurance regardless of health for their own family, starting a business, becoming a partner at a law or accounting firm (since often done with criss cross insurance). I have $250,000 plus guaranteed insurability options for another $250,000 every 3 years from 22-55 years of age. Cost to me? $42/month.

    Cost to the blogger – not eating out at Denny’s one night a month. Personally, I value my children and their future potential far more than a badly made dinner…but I digress.

    I would love to know the blogger’s stance on critical illness (which I already know his backside would pucker up on), particularly because that IS a financial risk to the parents if they have a sick child. Often parents are forced to go back to work when they want – and should – be by their child.

  15. Ryan

    Interesting read. In all my years of owning insurance the only policy that has ever made sense is a Whole Life policy with paid up additions…PERIOD. It is the only financial product that protects your wealth under any circumstance. For example, all those buy term and invest (or more accurately lose) the difference, which IS a risk based approach to wealth, have no options or control of their wealth. For example, 2008 market correction, the only asset that didn’t fall in value was the cash value in my WL policy. In fact it grew by 6%. Once value is created in the WL policy it becomes guaranteed and can’t fall in value.
    2ndly, it’s cheaper than TERM. Yes folks that right. You see when the so called smart people pay for term policies those premium dollars PERMANENTLY leave your economic world never to be seen again unless you die. With WL there is a future point in time (aprox 12 years) that 100% of the premiums that I paid can be returned to me, at my choosing. You can’t get that with any term product. The difference is preception. You see most people look at premiums as a cost (term policies there are an economic loss) vs. the CASH FLOW required to fund those premiums. Granted many people couldn’t afford the cash flow to fulfill their insurance needs.
    Now let’s look at it from the stand point of becoming sick or disabled. Term insurance isn’t going to do much for you is it. Well with my WL policy I have a total disability waiver rider on it. Essentially this will fulfill the mandate of my WL policy which would be to pay those annual premiums while creating that compounding growth in my cash value. If I’m unable to work and create an income the so called invest the difference isn’t going to happen. Again another risk based approach to managing wealth. No thanks.
    Ok let’s flash forward to retirement. There are 4 major ways in which I can use my WL policy to fund my retirement. I can cash it in and pay my tax. Not the best choice, but you can do that with an RRSP. I can take policy loans over x # of years and spread my tax liability (similar to RSP from tax point). I can leverage my policy. Since the banks know that WL is guaranteed, some of them will allow 100% leverage on the cash value. This is a NON TAX event since I am essentially collateralizing the policy cash value. The cash value continues to grow in step with the leverage loan. The 4th thing I can do is instead of reinvesting the annual dividends is have them paid to me each year as a taxable income.
    Can I get any of this with Term or even other investments? No really.
    Ok now let’s look at it from another point of view. Let’s suppose I don’t need to take advantage of some of the above for my retirement because you’ve been a smart investor and have some RSP, TFSA, Rentals, Non Reg INvt and other assets. And you have this desire to pass on your wealth to the next generation tax efficiently. Not only does WL insurance death benefits grow every single year (with paid up additions rider) and the death benefit paid out tax free, having such a policy in place will GIVE YOU PERMISSION to spend all your other assets during your life times and creat tax efficiency in how you spend your other assets by giving you choice. You can manage to spread your tax liabilities across a number of years vs. having it all paid at the top tax bracket in the year of death of the last surviving spouse. Further, it creates simplicity and harmony for the next generation as well. If you have several different assets structured in different ways (RSP vs. TFSA vs. Non REg. vs Principal Res. vs. Rental Prop etc.) it can create a nightmare in settling the estate. With my WL plan i can have the death benefit paid into several Testamentary insurance Trusts for the benefit of my kids protecting them and my wealth from unwanted parties including my kids creditors, spouses etc. etc. etc.
    Now speaking of insuring children. I bought a ton on my son of WL. Not only have I locked in his cost of insurance at age 0 four years ago, he’ll never ever need to buy life insurance again. The paid up additions buy more insurance every year. By the time he’s in his mid 30’s he’ll have close to $2.0 mill in death benefit and cash value of well over $500,000. Term won’t give him that. Here’s the other kicker…hope your sitting down…my wife and I are the owners of the policy. When we feel he is mature enough and responsible enough and earns enough to take over the policy himself, we can transfer the policy to his sole ownership without creating a deemed disposition for tax purposes. It’s one of the only assets a resident of Canada can own and transfer to a family member without creating a tax liability to the person giving the asset. Try doing that with a rental property, stock, mutual fund etc. Deemed disposition folks and you pay the tax. Essentially you can transfer the WL policy’s ACB to the child without tax issues to the parent.
    So find me a better investment and wealth management strategy? Don’ say Univeral Life. Cause it isn’t true. UL is not guaranteed. The investment risk is borne by the policy holder not the insurance company. Further, the Total disability waiver rider only covers your cost of insurance not the increasing cash values. It’s just like buy term investment (and lose) the differnce. The costs of the money management are excessive as well. With WL you don’t know the cost of money management. But I can tell you it’s less than 1%.
    The biggest drawback are the cash flow commitments. Doesn’t mean you need to buy 100% WL (but if you can afford the cash flow do it) but having some supplemented with Term to cover your need is wise.
    And lastly if your single…buy WL. It will save your arse when you loose all your money in the stock market on that Sino Forest play you thought was so brilliant at the time. ; )

  16. Robert

    You can take that point of view with anything. If I devote enough of my present cash flow to a car fund, in a few years I can buy a car outright and have enough money left over to pay myself to drive it. Great rhetoric, but that doesn’t mean it’s the only sensible way to buy transportation. If you take that point of view with everything, you’ll eventually be very wealthy. But you’ll also experience a very slow ramp-up in financial flexibility and material quality of life, because everything would initially cost you a ton of money.

    No one is suggesting to me that my purchase at Taco Bell should be coupled with a life-long financial savings system, yet somehow when I try to buy simple insurance against a well-defined risk for a specific period of time – for dirt cheap – I get told I’m throwing my money away unless I spend several times as much in order to essentially self-finance the product. Um, WHAT DID YOU THINK I WAS BUYING!!!??? Yeah… I was buying the benefit of not having to do exactly that.

  17. Monica

    Who knew that life insurance was such a hot button topic? Seriously though, I learned so much from reading the article and the following comments, and it makes me want to look further into the different policies that would benefit my family.

  18. zimpal

    It certainly is for the insurance company that takes you money and has no obligation to pay anything after the term is up. while term insurance is an impotant part of a portfolio it should not be the only type of insurance you own.

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