Is Life Insurance a Waste of Money?

Am I throwing money away every month?

If you own term life insurance, you may think you are wasting money every month. It’s not worth anything if you don’t die, so it’s got to be a waste, right? No.

To understand why it is not a waste, you need to understand that you aren’t insuring your life - you are insuring your income. If you die, your income stops. And if your income stops, your family doesn’t get to have as many nice things, vacations, experiences, or education. Sure, they may survive, but it’s a hell of a lot tougher to thrive on one income than two.

Life insurance gets paid out one-time (tax free) upon death. That money can then be invested and drawn from on a yearly or monthly basis, to simulate what your pay cheque would have been.

But it stops as soon as I stop paying for it!

The value of having life insurance is in the peace of mind you were provided while you had it. All that time, you knew that if you passed away, your family would have the same quality of life as if you were still around. Think of it like buying car insurance; when you stop paying for car insurance, your car is no longer insured. Similarly, when you stop paying for ‘income’ insurance, your income is no longer insured.

Ok, now what?

99.9% of Canadians who need insurance only need term insurance. It’s cheap, easy to apply for, and easy to understand. Assuming reasonable health and a non-smoking lifestyle, a 37-year old male can get $750,000 of 20-year insurance for about $50/month. A female of the same age and lifestyle could get over $1 million dollars for the same cost.

What’s the MAXIMUM Insurance I should have?

I find it hard to justify having more than 15x your annual after-tax income. If you earn $100,000/year after-tax, you should cap out at $1,500,000 of insurance.

$1,500,000 invested at 5% (after tax) would net about $75,000 a year without any depreciation of the nest egg. That amount would last for 28 years if you took the full $100,000 income-equivalent. By that time, kids would be one their own, your mortgage would be paid off, and your family would likely be in a pretty good spot.

What’s the MINIMUM Insurance I should have?

The least amount of life insurance you should have is 100% of your combined household debt. So, if you have a $500,000 mortgage, $20,000 in credit card debt, $80,000 in vehicle loans, then $600,000 of term insurance would be just fine.

If you can’t afford the payment on $600,000 of insurance, you can reduce the coverage to what you can afford. BUT, hard truth: if you can’t find $75/month in your budget for life insurance, you should probably change your budget and priorities. Just sayin’🤷🏼‍♂️.

What next?

I sell insurance. I’m happy to help you buy some, or answer any questions that this may have provoked. Give me a shout. [email protected]