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Jen Glantz
After having a baby last year, my husband and I agreed that getting life insurance is an important step to take. Not only do we want to make sure our child has financial coverage, but we want to take care of one another in case one of us dies, and that income is lost.
We've spent some time looking into different life insurance policies and noticed that the annual premiums can range from a couple hundred dollars to a few thousand dollars. My husband started to shy away from the idea of purchasing life insurance and instead suggested we invest that money instead.
I'm still a big fan of taking out life insurance, so I suggested a cheap life insurance plan I found from Corebridge Direct. It provided $250,000 in term coverage for just $13 a month. To help settle our argument, I asked certified financial planner Ryan Nelson if buying cheap life insurance is worthwhile or if it's better to invest that money elsewhere. Here's what he said.
When I told Nelson about how I wanted to go with a cheap plan, but my husband thought it was a waste, he said that not having a life insurance policy can come with devastating consequences.
"If you experience premature death and you don't have a life insurance policy, or you're underinsured, it could wipe out multiple generations of wealth in a family," said Nelson. "That's because your financial trajectory changes overnight. One minute you are accumulating, the next you are just trying to survive."
Without a life insurance policy, Nelson explained that loved ones might have to make challenging decisions like moving to a smaller home, selling assets, withdrawing funds from retirement accounts, taking a high-stress job to generate more household income, and scaling back sports, vacations, and other family activities.
He explained that even though it's the probability that I die at a younger age is low, it's a high-severity situation if it happens, especially in my situation where both my partner and I earn income for the family equally.
"Even a cheap life insurance plan that costs a few hundred dollars a year and has a $250,000 payout comes with benefits," he shared.
For example, Nelson explained that money could replace income for the other spouse, pay off debt, cover mortgages or car payments, or supplement educational costs for my child down the road.
I asked Nelson what he thought about my husband's idea to take the money we'd spend paying life insurance premiums every year and invest it instead. He said that it's not as easy as it seems.
"It would take a certain type of discipline, knowledge, and luck to invest that money monthly to build up a nest egg that would pay off the amount as life insurance would if you were to pass away prematurely," he said.
"To build a million-dollar nest egg by putting life insurance premiums into a low-cost index fund would take multiple decades," he said. "You might not live long enough to see it grow to that size. Life insurance buys you time."
If something were to happen to me in a few years, without life insurance, the investments I've made might not even be close to the same amount that a policy would have paid out.
I asked Nelson if there was anyone who would be better off skipping out on paying for a cheap life insurance plan. He shared that if a person has achieved financial independence, a goal that can look different for everyone, they might not benefit from an inexpensive life insurance policy with limited coverage.
"It's possible to be at a point where it doesn't make sense financially to have a cheap life insurance policy because you already have other financial resources in place, like meaningful balances in taxable brokerage and savings accounts that have immediate accessibility, as well as a robust retirement account portfolio that would support your loved ones if you passed away," he shared.
Nelson said it's less about how much a person has in their net worth and more about their spending habits, where they are in life, health issues, and other factors that come into play when assessing their assets. A financial advisor can provide insight into what someone needs based on their lifestyle.
"If a person isn't sure whether they should get life insurance or rely on their existing assets instead as financial coverage for their loved ones if they pass away, they should seek out the opinion of a trusted professional for an unbiased opinion on their personal financial situation. In these circumstances, I'd strongly recommend they connect with an advisor that does not sell life insurance," Nelson said.
My husband and I do not have millions of dollars or even a robust financial portfolio. We don't fall in the category of having financial independence that could cover my child if we both, or one of us, died. That means that a cheap life insurance plan is better than not having one at all.
