I can just save the money rather than invest in life insurance. My brother said that won’t work. Why won’t it work?
Answers | 3
Try to think of a life insurance death benefit as a constant. Your guaranteed-level death benefit 20-year term plan has a death benefit from the date of issue to the last day in the 20th year. For that entire time, it pays $400,000 if you die. Now, think about an investment which holds your principal and any gain. The account's value is variable. The benefit payable from an investment is not something that is programmed to match your family's needs at the moment you die. Not that it can't, but the benefit amount will always vary.
If you save money at the rate of $20,000 per year for 3 years, the amount in the account is $60,000. If you did that for 6 years, the amount is $120,000. At 10 years, it is $200,000. You have a family that needs the income you produce. They need $4,000 per month to live on, and suddenly you die in year 2. That leaves them $40,000 in the savings account or investment. At the rate of $4,000 per month (slightly reduced, since you are not around any more) that pile of cash will last about 10 months, and then they are in trouble. You are gone, and so is their financial support.
An alternate scenario is that you have a $400,000 life insurance policy and you die in year 2. Your family can live on that benefit for more than 8 years at the rate of $4,000 per month. It is wrongly assumed that the savings account is a pile of cash just like the life insurance benefit. It is not. It is a small thing that may one day become a large thing. The life insurance is a large thing from the very first day - and it is the large thing that your family needs from the very first day, Your brother is correct; it won't work.
I was reading your question and several thoughts came to mind; the first is “what are you trying to accomplish?” One mistake made very often when making financial choices is to try and make an investment choice (or other financial choice) without fully considering the end goal. To truly answer your question we should really know for what you are saving or what are you attempting to insure. There is a possibility that the answer is to buy some life insurance and save (and invest) some money.
I would suggest that you sit down with an advisor with whom you are comfortable, discuss your goal and then determine your options.