Why I may have life insurance even if I never purchase it

Boot lacesPhoto courtesy of Janet Ramsden

What’s the purpose of life insurance? It’s to help replace your income to your beneficiaries in case of your death.

With regard to the giant payout that a term life policy generates, if invested properly, not only can it be used to take the place of your lost income, but it can also be invested, and the interest from the windfall can be used perhaps to perpetuate that income.

Conventional wisdom states that one purchase 8-10 times your income in life insurance, depending on how much income needs to be replaced.

And as mentioned, I have none of this. I have no one who depends on my income, and should a piano fall on my head, that’ll be that.

But even though I haven’t purchased any life insurance, it might turn out that when the time comes to need life insurance, I might already have it.

Mini-life insurance that everyone needs

First off, arguably, everyone needs some form of life insurance, in the form of burial costs.

So, let’s say you go off and die. Burials can cost upwards of $10,000. Do you want to saddle others with the costs of your burial? Hell no.

But if you’re doing what I tallk about on this site, you’ll have an emergency fund in place. And this most definitely counts as an emergency.

Let’s extrapolate to larger costs

Assuming an income of $50,000, if one were purchasing life insurance, one might purchase $500,000.

But here’s the deal, we are all investing to have at least that much, probably more.

Think about it; if you have $500,000 or more in order to prepare for a long and fruitful retirement, and that piano falls, you now have $500,000! (Or rather, your beneficiaries have it.)

But in this case, you’re self-insured! You’re the First National Insurance Corporation of Yourself!

Being less FNICY

And that’s why, ironically, many of us may need less life insurance in our later years than our earlier years. If you’re a young family, you probably don’t have enough money saved up to cover your income in the case of an early death. In which case, you would want to purchase term life insurance.

But that’s why they call it “term”: it ends. And that’s a good thing, because when it ends, you have the option of purchasing another term’s worth of insurance as your situation requires. And even though it’ll be more expensive (see the graph here), you may need less of it, as your assets will have grown, which might offset the increase.

And at some point, when your assets grow to a sufficient level, you won’t need life insurance at all. Now isn’t that a premium idea?

But enough about me. Do you plan to self-insure?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on November 3, 2016