Term Life Insurance

Term life insurance is cheap, simple, and necessary only if someone depends on your income.

If you’re single with no dependents, skip it. If you have a spouse who relies on your paycheck, kids, or aging parents you support financially, buy a term policy. The purpose is replacing your income if you die, so the people who depend on it can keep going.

Why Term, Not Whole

The word “term” matters. Term life covers you for a set period — usually 20 or 30 years — and pays a death benefit if you die during that term. The premiums are low because most people don’t die during the coverage period.

Whole life insurance, by contrast, is the worst financial product routinely sold to ordinary people. It combines a mediocre investment account with overpriced life insurance and charges fees that would make a hedge fund blush. An agent will tell you it “builds cash value.” That cash value grows at 1-3% annually while the agent collects a commission equal to 50-100% of your first year’s premium.

Buy term. Invest the premium difference in an index fund. You’ll come out tens of thousands of dollars ahead over 20 years.

How Much Coverage

A common rule: 10 to 12 times your annual income. That gives your dependents enough to replace your earnings for a decade while they adjust.

If your spouse earns a comparable income and your mortgage is manageable on one salary, you might need less. If you’re the sole earner with three kids and a mortgage, you might need more. The point is replacing lost income, not creating a windfall.

Some specific factors to consider:

Outstanding debt — a mortgage, car loans, or student loans your family would need to cover
Childcare costs — if a surviving spouse would need to pay for childcare to keep working
Education — if you want coverage to include college funding for your kids
Existing assets — your current portfolio reduces the gap your life insurance needs to fill

When to Drop It

As you build wealth and your dependents become less financially dependent on your paycheck, the need for life insurance decreases. This is one of the insurance adjustments most people never make.

A person with a $1.5 million portfolio and a paid-off house doesn’t need life insurance regardless of family size. The portfolio is the life insurance. The death benefit it was providing — income replacement — is already covered by investment returns.

For someone on the path to FI, term life is a bridge. It covers the accumulation years when your portfolio is small and your family’s exposure is high. Once the portfolio can sustain your family’s spending indefinitely via the 4% rule, the bridge is no longer needed.

Don’t keep paying premiums on a policy that’s outlived its purpose. Review annually alongside your net worth.