Top 6 Alternatives To Life Insurance

Life insurance is a recommended piece of your personal financial portfolio. But some people forgo life insurance, whether due to not wanting the hassle and cost, or because they can’t qualify. Luckily, there are products out there that avoid many of the downsides of life insurance while still providing protection for your loved ones. You can use these alternatives to life insurance to replace many of the benefits life insurance offers, and in some cases even add extra coverage.

Now there are many reasons to purchase a life insurance policy – here are 15 reasons to buy life insurance. The big ones are the tax-advantages, avoiding probate, and protecting your loved ones.

But many people still think life insurance is a waste of money. Everyone should have some protection, so in this post we will go over 6 alternatives to life insurance for those who don’t want or can’t qualify for a life policy.

The Top 6 Alternatives To Life Insurance

If you don’t want life insurance or if you can not get life insurance due to a pre-existing health condition, there are alternatives to life insurance that you can use to replace many of the benefits life insurance offers. In some cases, these alternatives even offer advantages to a traditional life insurance policy.

The top 6 alternatives to an individual life insurance policy are:

1. Self Insurance
2. Mortgage Protection Insurance
3. Accidental Death & Dismemberment (AD&D) Insurance
4. Employer Group Insurance
5. Critical Illness & Long-Term Care (LTC) Insurance
6. Pre-paid Funeral Plan

In this post, we will explain what each alternative to life insurance is and how they compare to life insurance.

1) Alternative to Life Insurance #1: Self-Insure

Self-Insurance is when you have enough assets to fund any potential expenses out of your savings and investments. In the case of using self-insurance to replace life insurance, you would want enough savings that your dependents are financially secure if you were to die. For example, if you think $1 million is enough to cover all future expenses for your family, and you have over that amount, you may opt to self-insure.

The main benefit of self-insurance is you avoid a reoccurring expense in the insurance premiums and historically investing has outperformed life insurance cash value growth. By forgoing insurance and investing the money, you may wind up with a larger nest egg.

2) Alternative to Life Insurance #2: Mortgage Protection Insurance

A home is a sentimental place for a family, and the last thing most people want is to have their loved ones be forced to move while grieving. Your mortgage is likely the largest debt you have and for many people, their life insurance policy was purchased primarily to pay off the mortgage.

In fact, your mortgage is one of the main components of both the DIME Method and our preferred DEEM Method^TM of calculating your life insurance.

If you don’t want to go through the hassle of the underwriting process and only care about covering the cost of your mortgage, you can opt for mortgage protection insurance.

Mortgage protection insurance is similar to life insurance as it pays out a death benefit upon the death of the insured. However, mortgage insurance pays the benefit directly to your mortgage lender and doesn’t require any underwriting typically.

[Professor B.T. Effer Note – Underwriting if the process in life insurance where you need to fill out a long health questionnaire and see a medical professional for a check-up and to give blood for tests. It can take up to 90 days from when you start the underwriting process before you get your policy issued. Mortgage insurance is a much quicker and less invasive underwriting process.]

The big benefits of mortgage insurance over traditional life insurance is it removes any administrative headaches for you and your loved ones. You don’t need to worry about your spouse needing to handle a large lump sum payment as your mortgage is just paid off upon your death.

3) Alternative to Life Insurance #3: Accidental Death & Dismemberment (AD&D) Insurance

Accidental death & dismemberment (AD&D) is an insurance policy that pays out for the accidental causes of death & injury specified in the policy. This differs from a regular life insurance policy as regular life insurance is “all cause” insurance and pays out for any death except for those excluded in the policy. (Typically suicide, war, and natural disasters may be excluded).

AD&D is technically a type of life insurance, but only in the pre-defined cases. In addition to paying out for accidental death, it has the added bonus of paying for specific serious injuries like paralysis, loss of limb, or blindness.

Typical AD&D policies pay out for serious accidents like:

• Serious car accidents
• Workplace accidents
• Firearm accidents
• Falls

An AD&D policy is typically slightly less expensive than a similar sized term life insurance policy. But the major benefit is that you don’t require a medical exam which allows for easier and quicker issuing of the policy.

And when you are young, the majority of deaths do not occur from illness but from accidents, an AD&D policy may be a better fit. Especially as serious injuries are also covered which saves you from needing separate accidental coverage on your life policy.

[Professor B.T. Effer Note – Many life insurance policies offer an AD&D rider that you can add onto your policy for a marginal higher cost. The AD&D rider adds the injury coverage and typically increases the death benefit if from an accident.]

4) Alternative to Life Insurance #4: Employer Group Insurance

Many employers offer group life insurance to their employees, either as a benefit or for purchase. Group life insurance differs from individual life insurance by being:

• Guaranteed issue
• Annual renewable
• Coverage is a salary multiple (typically)
• Not portable
• No Cash Value or Riders

How group insurance works is the entire company gets quoted a flat rate. Then every employee is able to purchase coverage at that rate, regardless of health.

The benefits of group life come from being provided by your employer at no charge as part of your benefit package, generally. And it is guaranteed issue meaning you can’t be denied.

The downsides of group life are you lose it when you end your employment, the price is high for anyone with average health or better, and there is no cash value or flexibility.

Also, group life may limit how much insurance coverage you can obtain and it may not be adequate for your needs.

5) Alternative to Life Insurance #5: Critical Illness & Long-Term Care Insurance

Critical Illness Insurance and Long-Term Care (LTC) Insurance serve similar purposes but in slightly different ways.

A critical illness policy will pay a pre-determined lump sum for a qualifying serious illness. Whereas a LTC policy provides daily cash benefits to cover the cost of services provided in nursing homes, at-home care, adult day care facility, or an assisted living facility. Nursing homes can cost over $200 per day, so you can quickly use up any savings you had planned to leave to your loved ones.

In general, long-term care policies are for end of life care while critical illness policies cover an unexpected large medical bill while you are younger.

Both policies serve the purpose of preventing you from draining your savings due to health reasons. If you are forgoing life insurance because you feel you have adequate savings, these policies can ensure you don’t end up burning through your assets.

6) Alternative to Life Insurance #6: Pre-Paid Funeral Plan

A pre-paid funeral plan is an alternative to life insurance, particularly final expense insurance. A pre-paid funeral plan is made directly with a funeral home. You can pay in a lump sum or in installments.

These plans allow you to cover your funeral costs before you pass so your loved ones don’t need to worry about the financial stress while grieving.

With the average funeral cost ranging from $10,000 to $30,000, pre-paying can save your beneficiaries a large cost. The difference between pre-paid funeral plans and final expense life insurance is that final expense insurance is a whole life policy that pays a benefit (less than $50,000) to your beneficiary when you die for the purpose of covering the cost. While the pre-paid funeral expense is you paying the funeral home directly.

However, both pre-paid funeral plans and final expense insurance tend to be relatively expensive for the protection they offer.

Reasons To Have Life Insurance

Despite alternatives to life insurance being available, there are many reasons to have life insurance. We have previously identified 15 reasons to purchase life insurance and the big ones are:

• Replace lost income & pay off outstanding debts
• Tax-advantages and to pay estate taxes
• Affordability
• A cash value account that grows tax-deferred
• Avoiding Probate
• Optional riders adding features like LTC, accelerated benefits, and
• Locking-in future insurability

The Final Word

Life insurance can be an important part of your personal financial portfolio. It is the main asset in the protection bucket of the 5 pillars of personal finance.

However, if you don’t want or can’t get an individual life insurance policy, the 6 alternatives listed can be used to cover many of the same risks. You could use one or a combination of the above to ensure you are still leaving your loved ones financially secure while avoiding the underwriting and administrative headaches that come with life insurance.

However, you want to ensure you are doing enough to help your grieving family. Therefore, you should do your own research and talk to a financial advisor to see if life insurance or an alternative to life insurance is the correct choice for you.

Frequently Asked Questions (FAQs):