Why Life Insurance Is A Waste Of Money

People have many misconceptions about life insurance. Many people believe life insurance is a waste of money, while others swear it is necessary. Like most things, the truth likely lies somewhere in the middle.

However, it is undeniable that many people are underinsured. According to the insurance industry. It is estimated that 60 million American households are underinsured by nearly $200,000 of their recommended life insurance amount.

So what are the top 10 reasons people think life insurance is a waste of money and what are the counterarguments to those reasons?

10 Reasons Why Life Insurance Is A Waste Of Money

There are many reasons life insurance may not be right for you. Here are the top 10 reasons why life insurance may be a waste of money:

1. No Dependents
2. No Spare Room in Your Budget
3. It is Expensive
4. It doesn’t cover your needs
5. Self-Insurance: You have other ways to protect your loved ones
6. Can be a hassle to get, maintain, and file a claim
7. Your coverage can expire
8. You have a pre-existing health condition
9. Difficult to cancel and high surrender charges
10. Enough coverage through your employer

We believe life insurance is crucial and it is the main protection asset in the 5 pillars of personal finance. Additionally, there is a multitude of reasons to purchase life insurance and we highlight the to Top 15 Reasons to Buy life insurance here.

In this post, we will walk through the above 10 reasons as well as provide a counterpoint for why life insurance may still be necessary.

1) You Have No Dependents – Life Insurance May Be A Waste of Money

The main reason life insurance may not be a good fit for you is if you have no dependents. Life insurance’s purpose is to provide protection to those who depend on you and/or your income.

If you have no one that financially depends on you, then spending money on life insurance may not make sense

Reasons For Life Insurance Even If You Have No Dependents

However, just because you don’t have dependents doesn’t mean you can’t benefit from life insurance.

For one, many people have non-dependent family that they may consider helping out. If you help a parent or relative financially or plan to in the future, you may want to ensure they are protected.

Secondly, by buying coverage when you are young and healthy, you can lock-in lower prices for life. Even purchasing a cheap term life insurance product with a term conversion rider will save you money now while locking in future insurability.

Lastly, many life insurances come with optional riders like accelerated death benefit. These can act as a quasi-long-term care product for a reasonable price. If you wind up with a debilitating disease and have no family to care for you, having access to funds to get top notch care will be valuable.

2) You Have No Room in Your Budget – Life Insurance May Be A Waste of Money

If you don’t have any free cash flow and are already having a hard time saving and investing enough, you may not want to purchase a life insurance policy. Life insurance premiums are generally paid periodically (monthly, quarterly, semi-annual, or annually) and are a fixed expense you need to continually pay.

This means after you purchase a product, you are on the hook for continued future expenses.

And missing a payment typically results in your policy lapsing after a grace period. This means you lose your coverage and also you won’t receive any of the payments you made back.

Reasons For Life Insurance Even If You Have A Tight Budget

If you have dependents and don’t have money to leave them, you may need more life insurance than someone more financially well off. For many, a life policy is the only financial help their loved ones will get.

A term policy can be an affordable way to get coverage. A $500,000 policy on a 40-year can cost as little as $1 a day.

If you are having a hard time finding money to pay for life insurance, it may mean you need to budget or track your spending more closely.

3) Life Insurance is Expensive – Life Insurance May Be A Waste of Money

There is a general belief that life insurance is too expensive. And for many types of products, this is true.

Permanent life insurance (whole life & universal life) can cost $500 a month for a healthy 40-year old with a $500k policy. A general rule of thumb is to have at least 10 times your annual salary in life insurance coverage, so a person making $50,000 a year would pay around $6,000 a year to have permanent life insurance.

And then there is the fees. For universal life, all the fees are spelled out (whole life they get aggregated into one fee). There are:

• Flat annual policy and administrative fees – per dollar fees
• Surrender charges and withdrawal charges – fees you pay to access your cash value
• Cost of insurance (COI) fees – annual fee applied to the difference in your death benefit and cash value that increase each year as your probability of dying goes up
• Premium loads – fees taken out of any premium you pay
• Investment fees – fees on your investments in your cash value account
• Expense fees – percent fees applied to your coverage typically based on the face amount
• AUM fees – fees applied to your cash value balance
• Secondary guarantee fees – if your policy has any secondary guarantee you pay a fee
• Rider fees – if you elect a rider you pay a fee
• Usage fees – there is often a charge to use a rider or even access your death benefit
• Communication fees – there can be charges if you request information from the company or to process information you send to the insurer

Not all policies have all the above, but most policies can have 10 or more different charges.

Reasons For Life Insurance – It Can Be Affordable

However, you don’t need all or any of your coverage to be permanent. Term life insurance is significantly cheaper than permanent insurance. Typically a permanent policy costs 5 to 15 times as much as a similar sized term life policy.

In fact, one of the most commonly recommended strategies is to buy term and invest the difference (BTID). We recommend people use a term life insurance ladder in addition so they have multiple opportunities to make coverage decisions.

And there are ways to extend your term life insurance coverage past the term period. This allows you to have cheap insurance now, with the option for extending your life insurance coverage later for a higher price.

4) Life Insurance Doesn’t Cover Your Needs – Life Insurance May Be A Waste of Money

Everyone has different needs with their coverage. You may be more concerned about the risk of needing long-term care near the end of life, or having a liquid fund for unexpected expenses, or worried about inflation.

There are many financial concerns that you may have that a death benefit doesn’t help with. And even worse, adding an expense through reoccurring insurance premiums may make it harder to handle those other concerns.

Reasons For Life Insurance – It Can Be Flexible

Life insurance comes with many optional riders that add flexibility to the policy. There are numerous riders for all sorts of different use cases. Some common riders are:

• Accelerated death benefit riders – allow you to access your death benefit while alive for qualifying expenses
• Waiver of premium riders – waive premium for qualifying health issues or unemployment
• Long-term care riders – pay out a specified amount if you have a qualifying long-term care expense
• Critical illness riders – pay out a lump sum if you get diagnosed with a qualifying illness

Additionally, most permanent life insurance has a free partial withdrawal amount to allow you to access some of your cash value every year without paying fees. This is typically around 5-10% of your cash value.

Before you write off life insurance as not capable of fulfilling your need, you should talk to an agent and see what is available. You may be surprised.

5) You Self-Insure – Life Insurance May Be A Waste of Money

Self-insurance is when you have enough savings that you are able to cover any expenses out of your own pocket. If you have a large nest egg already or there is a trust set up for you, then you may have enough money to pay all future expenses.

For example, if you think it would take $1 million to cover your spouses cost of living expenses for their life, and you have over $1 million in savings, it may seem like you don’t need life insurance.

Reasons For Life Insurance – It Is More Than Just A Death Benefit

Even if you have ample savings, you may still consider purchasing life insurance. There are many reasons high-net worth individuals use life insurance:

• Taxes – Life insurance allows for building a cash value account in a tax-advantaged way. In fact, your life insurance cash value can be comparable to a Roth IRA and many high-income individuals use life insurance after maxing out their contributions to other retirement funds.
• Estate Planning – Life insurance allows for convenient estate planning as you can name beneficiaries or set-up trusts to receive the death benefit. By using life insurance to fund a trust, you are able to protect your money better and even use a spendthrift clause to ensure your heirs can’t squander the money. At a minimum, a life insurance policy can be used to pay any inheritance taxes.
• Avoid Probate – Since life insurance transfers automatically from the insured to the beneficiary upon death, life insurance generally avoids probate.

In fact, many wealthy people use life insurance for all these reasons and more. So even if you can self-insure, you may want to explore life insurance with your financial advisor.

6) Life Insurance Is A Hassle – Life Insurance May Be A Waste of Money

Life insurance can be a hassle to get, maintain, and for your beneficiaries to file a claim. First, when you apply for insurance, you generally need to go through underwriting. This typically means seeing a medical professional for a check-up and to give blood. Additionally, you likely need to fill out a health questionnaire that can be dozens of questions.

Then once you get a policy, depending on how you use it and how markets do, you may end up having to pay more money to keep the policy funded than expected.

Finally, when it comes time for your family to file a claim and collect your death benefit, it can be an administrative headache to get all the paperwork together and filed.

Reasons For Life Insurance – There Have Been Improvements

Insurance companies know that life insurance can be confusing for their customers and have been working to streamline the process.

Many insurers are offering simplified underwriting. They ask fewer questions and use algorithms to underwrite the customer without the need for seeing a medical professional. Some are even able to give an instant decision within minutes of you starting to fill out the forms. (But note, the healthier you are, the better it is to go through full underwriting as you likely get a lower price).

Secondly, with whole life policies or many universal life policies that have a lifetime no-lapse secondary guarantee, you can get a premium that is guaranteed to fund your policy till you die. These improvements allow for less uncertainty to maintain your policy.

Lastly, insurance companies have improved their use of big data to confirm insured deaths and process claims faster.

7) Life Insurance Policy Expires – Life Insurance May Be A Waste of Money

Term life insurance provides coverage over a specified period of time for a flat premium. After that period is over, you policy expires unless you use one of the options to extend your coverage.

If you purchased a 20-year term policy and don’t die over the next 20 years, you would have paid premiums to the insurance company and got no benefit in return.

Even with permanent insurance, if you miss payments your policy may lapse and your coverage expires. This again means all your previous premium payments are gone.

This can be a hard pill to swallow.

Reasons For Life Insurance – Buy A Policy For A Specific Purpose

When you purchase a life insurance policy, it should be for a specific purpose. For example, if you had a child and want a policy that will provide money to raise your child to adulthood, then a 20-year term policy may be a good fit. If you don’t die then the policy has served its purpose and is no longer needed when it expires.

Or you could buy a 30-year term policy or a decreasing mortgage protection insurance policy to cover the cost of a new home purchase.

Lastly, you can always buy a policy with riders that provide flexibility for you in the future. For instance a term policy with a term conversion rider or a permanent policy with a hardship rider. In short, there are ways to ensure coverage you want doesn’t go away.

8) You Have A Pre-Existing Health Condition – Life Insurance May Be A Waste of Money

If you have a serious pre-existing health condition, it may preclude you from getting a policy at many insurance companies. If you find an insurer who is willing to sell you a policy, you may wind up with a ‘sub-standard’ rate where the cost of the insurance is very high.

Sometimes the charges are so high that you wind up paying more premiums over time than your death benefit.

Reasons For Life Insurance – Policy Options For Pre-Existing Health Conditions

If you do have a serious pre-existing health condition that makes getting an individual policy impossible, you shouldn’t completely give up on life insurance. Many employers or affinity groups (AAA, Knights of Columbus, etc.) offer guaranteed issue group life policies. By working at the firm or being a member of the group, you are able to participate in the life insurance at the same rate as everyone else.

And some employers group life plans even allow purchasing 10 times your annual salary worth of coverage.

It may take some searching, but you may still be able to get life insurance protection or one of the many alternatives to life insurance.

9) Life Insurance Is Difficult To Cancel And Has Surrender Charges – Life Insurance May Be A Waste of Money

If you decide you no longer want a life insurance policy and try to cancel, it can be difficult to navigate the administrative paperwork. Then when you do cancel, you may get charged a surrender fee depending on your product. Many permanent products have surrender charges for 15 or more years after the policy is issued.

Reasons For Life Insurance – Know Your Policy

The issue with many life insurance policies is they are sold to a customer, not purchased by the customer. If you don’t know what you are buying and just letting your financial advisor make decisions for you, you are more likely to cancel your policy later.

You advisor needs to run illustrations and show you how the policy behaves, what the charges are, and different scenarios. You should ask as many questions as you need to be comfortable that the life insurance product is right for you.

10) You Have Coverage Through Your Employer – Life Insurance May Be A Waste of Money

Many companies will provide some life insurance coverage to their employees for no explicit cost. Typically you get 1-year’s salary or a small multiple worth of coverage. Your employer pays the premiums for the policy as long as you remain employed.

Many people see this as having life insurance and it being enough. Therefore they don’t think they need any other coverage.

Reasons For Life Insurance – Your Employer Coverage Is Likely Insufficient

To start with the obvious, if your employer is paying your coverage, if you get let go you will shortly lose that benefit. Tying your life insurance coverage to your employment is concentrating your risks on your employer.

Secondly, the typical rule of thumb for the minimal amount of coverage you want is 10 times your annual salary. This means your employer coverage is magnitudes less than what you likely need. (There are more precise ways to determine how much life insurance coverage you need, but 10x is a decent starting point).

Buying your own individual life policy gives you not only the ability to choose the coverage you need, but it is portable. That means it will stay with you as you change jobs.

Lastly, your employer group policy doesn’t provide riders or a cash value.

The Final Word

There are a lot of misconceptions about life insurance. We covered the top 10 reasons why life insurance is a waste of money and provided counterpoints.

The purpose of life insurance is to protect you loved ones after you are gone. But life insurance can be so much more:

• Account that provides liquidity
• Coverage for long-term care or disability
• Provide tax-advantaged growth
• Keep assets out of probate
• Help with estate planning

Most people could benefit from some life insurance and nearly everyone with a dependent should strongly consider getting coverage.

But life insurance is complex, so if you are uncertain, work with a professional and have them help you make an informed decision.

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