No, seriously, do you really need Life Insurance or not?
Last week I had an interesting conversation with the fellow FIRE blogger – Financial Patriot Blog who wrote on Twitter that he and his family don’t buy Life Insurance
Why we never bought life insurance:
On average, a life insurance company may expect to pay out a death claim on a term life policy for about 1 out of every 100 people insured.
— Finance Patriot Blog (@financepatblog) December 26, 2017
He’s absolutely right. Statistically speaking probability of using life insurance benefits is almost zero; it’s less than 1%
But it’s not so simple.
Insurance in Soviet Russia
Insurance business in Soviet Russia was the government prerogative. There was only one company called Rossgosstrakh which had about 140,000 insurance agents all over the country.
In early 80x, the insurance market in USSR was about 161B Soviet rubles, which is about $550B. But the way the whole market was structured and gained was typical for USSR.
Every Soviet citizen was a government employee, because every organization, factory or a service “company” was the government property. People didn’t have any small business it was criminal activity.
From every paycheck, you would have some mandatory withdrawals. Your trade union had to decide what type of withdrawals (in addition to the taxes) you would have.
My father, who was a coal miner, had these:
- life insurance
- health insurance
- disability insurance
- trade union fees
Because of these additional mandatory withdrawals, people didn’t like insurance at all, a lot of people used to think that this is unnecessary crap that they have to buy because the government said so.
As a result, I grew up with an impression that all insurance business is a scam.
After our immigration to the States in 2013, I realized one simple thing. It was a revelation to me. We don’t have anyone here.
That was a really hard thing to grasp before the immigration, I know.
And the human mortality rate made the situation even worse. It’s 100% if you don’t know.
No, seriously, living in Russia we even didn’t think about this. We even didn’t ask ourselves a simple “what if” question. We knew if something happened to us our kids would be fine, our parents would care about them.
We took it for granted.
A couple of months after immigration, when the first euphoria ended, we understood one simple fact – there’s no one who would help my wife is something happened to me. There’s no one who would take care of our kids if something happened to both of us.
First time in my life at the age of 30 I realized the whole weight of responsibility for my family. And we didn’t have enough money, nor any assets at that time. In the matter of fact, we were in debt.
Being a good husband I had to take care of my family, because if something happens (I know, I know) at least money wouldn’t be a thing to worry about.
The only purpose of life insurance is to replace an income in the event of death.
That’s it. The only reason to buy life insurance is if you have a family that relies on your income and you are not self-insured (we’ll talk later about that).
Insurance is not an investment
I already wrote that Emergency Fund is not an investment, and now it’s time to do the same for insurance.
Insurance is not an investment.
Don’t even consider insurance as an investment vehicle. I remember when I started reading about insurance and was trying to understand what I need to buy, it was a nightmare.
A bunch of gimmicks and crappy products like cancer insurance or cash-value policies and so on.
No, no, no… You just need a simple life insurance. That’s it. At least this is what I figured out after reading a bunch of information about that matter.
Before I bought Life Insurance I had to answer these questions:
- How many years of coverage do I need?
I have two kids: 10 and 5 years old. And I want to see them in college and more importantly, I want to see them debt free.
Also, we don’t own a house yet. We are saving our downpayment and planning to buy with 15 years mortgage maximum with a plan to pay it off as soon as possible (5-7 years).
After thinking about that and doing some simple math I decided that 10 years term would be more than enough for me and my wife. In 10 years our kids’ college fund will be good enough to go to college. In the matter of fact, our oldest one will be in college at that time. And in 10 years our house will be paid off. Thereby we decided to go with 15 years term for my wife and 20 years term for me.
- How much money coverage do you need?
After reading several articles and websites I found that the rule of thumb is to have 10 times of your annual income coverage. In this way, if something happened to you your spouse can invest the money and live off that investment for 10-15 years.
We decided to go with 1 million coverage for my wife and me.
$$ How Much $$$?
It’s not free, you have to pay some money. And as Financial Patriot reasonably remarked you could’ve invested the money you pay for life insurance and cut the middleman. But could you?
Let’s take me, I am 35 years old in a good shape and health. I don’t smoke cigarets nor drink alcohol. What would the price for myself be?
As you can see here life insurance is not expensive at all. People spend more money on the cable than on insurance. And yes, I could’ve invested this money over 20 years and would’ve got…
I would’ve got $26,710 Don’t take me wrong, this is a lot of money, and you send me a check even for a half of it I will cash it. But will this money support my family when I die?
And if you are 25 years old and just married and started your journey to wealth, just buy life insurance. Say I Love You to your spouse, your kids.
When you are young and healthy the price is nothing, comparing to almost everything you buy. No, I mean seriously…
“Hey, Russian, but my wife doesn’t work. Why do I need to buy the insurance on her?”
I’ve been married for 11 years, and I can tell you this, even if your wife doesn’t work outside of the home, she WORKS and WORKS A LOT inside the home. Don’t believe me? Just ask your wife to stop doing everything she usually does at the house, you’ll be surprised.
And no, insurance for your wife is not that expensive either.
What insurance does it transfer some risks, that’s it. And I am willing to pay the price, especially this price, for the risk transfer we get.
You DON’T need a Life Insurance
But I totally agree with Financial Patriot, by the way, you should read his blog if you don’t do it already. You don’t need life insurance. Don’t buy it, don’t waste the money, invest them or do something more valuable IF you don’t need life insurance.
Personally, I wouldn’t buy any life insurance if I didn’t have the family. If I were not married and didn’t have two adorable daughters I wouldn’t buy it at all. Just because there’s no one who depends on my income.
The second scenario when I wouldn’t buy life insurance or would stop the current plan when my family reaches Financial Independence. As soon as our investment portfolio generates enough income to support my wife and kids I cancel both of the policies.
What about you? Do you have life insurance or not and why?