Why I don’t need more life insurance than what I get from work

Nearly every personal finance decision you make has a tradeoff.

If you build up a big emergency fund, you could have been paying down debt instead.

If you pay down debt, you could have been investing more in your 401(k).

It’s why financial “gurus” spend so much time outlining the order of operations in which you should utilize your money, like with Dave Ramsey’s baby steps. Every dollar you spend has an opportunity cost.

The same goes for purchasing life insurance. In general, most forms of insurance, like car insurance, homeowners insurance, and medical insurance, are highly recommended (and in some cases mandatory); life insurance is slightly different. You have more of a choice in how you want to proceed with life insurance, if at all.

Right now, I’m opting for a bare-bones term life insurance plan through my employer, which covers 1x my annual salary and nothing else.

Why I use a minimal life insurance plan through work

At this point in my life, I don’t think I need a robust life insurance plan. I also don’t feel permanent life insurance is a good use of my money.

There are a few reasons I’m not enrolling in additional insurance outside of my work plan:

  • I’m low risk: Knock on wood, but as a relatively healthy person in my late 20s, the chances of me (or better said, my beneficiary) using the plan are low.
  • There is no strong need for the death benefit money: I’m married, but my wife also works, and we have no kids. We also no longer have outstanding debt outside of a mortgage. There would not be a strong need for life insurance money outside of typical funeral costs.
  • It’s easy: I also can’t ignore the fact that enrolling through work is easy. I don’t have to shop around and find the right plan for me — I can simply select the basic coverage during my open enrollment period at work.

By foregoing additional life insurance, I get to keep what I would be spending on premiums every month and either save, invest, or spend that money. Which, according to Policygenius, is estimated at $27.56 a month on average (for a 20-year term plan with a $500,000 payout).

While $27.56 might not sound like much, that comes out to over $300 per year, or over $6,600 over the life of the 20-year insurance policy.

My decision won’t be right for everyone

While this is my plan, it’s not necessarily the best for everyone. There are a few risks that I take on by only enrolling in my minimal life insurance plan, including:

  • Lack of portability: The plan will not stay with me if I am fired or leave my job. At that point, I would need to shop around for a new plan either through a new employer or individually.
  • Gaps in coverage: The lack of portability creates a risk for gaps in coverage, too — especially if you are between jobs for a significant amount of time.
  • Might not be enough: Basic coverage might not be enough for most people, especially if you have kids who rely on your income or substantial debt yet to be paid off.

Last, the most significant risk of waiting to buy a term life insurance plan is that it gets more expensive as you get older. Just as you start having kids, potentially buy a house, and decide you need a more robust plan, it gets more expensive!

Should you get a big life insurance plan while you’re young?

Life insurance has the potential to get more expensive as you get older for two primary reasons:

  1. The older you are, the riskier you are to take on as an insuree.
  2. You also take on the risk of developing a health issue later in life, making insurance premiums grow more than you might have anticipated.

This begs the question: Should you buy a plan while you are young to lock in a lower rate?

Using the same numbers from Policygenius (assuming a 20-year term policy with a $500,000 death benefit), a 25-year-old male can expect to pay about $26.74 per month, a 35-year-old male would pay about $29.09 per month, and a 45-year-old male would pay about $59.73.

Once you turn 55, the monthly premium jumps up to $151.19.

To me, the difference between your 20s and 30s is relatively low, and I’d rather invest any spare money I have into tax-advantaged accounts for the moment.

Since I don’t necessarily need additional coverage at this point in my life, I don’t see a huge benefit in enrolling in a policy sooner to save a few bucks a month.

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