When to buy term life insurance can be a tricky question to answer.
In an ideal world, the answer would always be "Right now. Stop reading this blog post, buy it, and come back." But that’s not always how things work. You might not need life insurance, or you might not be able to afford it.
Or you think you’re not able to afford it.
We’ve talked before about how the cost of term life insurance is overestimated by a lot of people. Other people might think that life insurance conflicts with their other financial priorities. That’s why this tweet to finance guru Dave Ramsey caught our attention:
@DaveRamsey We have 4 kids and currently on baby step 2, should I get term life insurance now or wait until we're debt free?
-- Daniele Longo (@DaniLongoDesign) February 24, 2017
We’re grateful that our friends at His and Her Money tagged us in the post, but it’s a valid question: If you’re in debt, should you pay it off before you buy life insurance?
Why you might want to wait to buy life insurance
Honestly, if you do decide to wait to buy life insurance, it’s easy to understand why.
Debt can be crippling. American student loan debt totals $1.3 trillion. The average credit card debt is $5,700. Add that on top of your mortgage, and car loans, your everyday expenses...it adds up.
The "baby step 2" referred to in the tweet is part of Dave Ramsey’s 7 Baby Steps philosophy, the second of which is to pay off all debts (except for your house). That’s obviously an admirable goal. The last thing you want to do when you’re in debt is add another expense. So you’ll pay off any debts you have, then add life insurance to your budget. Simple, right? Actually, not quite.
Life insurance is a different kind of purchase than, say, a new car. Part of the point is that insures your loved ones from your debt. In fact, your debt is a reason to buy life insurance now.
Why you should buy life insurance while you still have debt
You should buy life insurance because you have that debt. Putting it off makes that debt even more dangerous to your family than it is now, and can put even more financial hardship on your loved ones in the future.
Life insurance protects your family from that debt
You might think of your debt as, well, yours, and that may be the case now. You want to a four-year university, you racked up student loan bills, and you make your payments every month.
But if you die, who is in charge of that debt?
That depends. If your debt is co-signed, your co-signer is on the hook. Student loans? Your parents probably co-signed. Mortgage? Maybe your partner’s name is also on it.
It’s hard enough to deal with debt. But if you’re the primary breadwinner, imagine how much harder it’s going to be for your family to pay off debt without your income around.
A 30-year, million-dollar term life insurance policy costs around $70 a month for a healthy 35-year-old man. For most people, that’s more than enough to cover your debt. Think about how much you pay each month for all of your debts combined. Seventy dollars is probably a fraction of it, and you may only need half of that, or a quarter, to make sure your family doesn’t inherit your debt.
Contrary to first impressions, life insurance shouldn’t be put off until you pay off your debt; it’s even more important to have while you have that debt.
Putting it off increases your rates
Another reason to buy term life insurance sooner rather than later? You’re just making it more expensive for future you.
Life insurance rates increase by an average of 8-10% every year you put off getting a policy. A policy that costs around $32 when you’re 25 years old costs $86 when you’re 45. If you wait until you pay off all of your debt, you’re going to end up owing a lot more on your policy than you would have otherwise.
Tips for buying life insurance while you’re in debt
Okay, so you need life insurance when you’re in debt – especially when you’re in debt. But that’s easier said than done, right? That doesn’t mean you can magically afford it.
Well, of course it’s not magic – it just takes a little work with your finances.
Budget for life insurance
When you want to make any substantial purpose in your life, you have to budget for it. Life insurance is no different.
Before you apply for life insurance, you should calculate your life insurance need by adding up all of your assets, your future plans (like retirement), and, yes, your debt, and make sure the coverage amount and term length is enough to cover everything.
Then, compare policies. You don’t want to overpay for your policy, and comparing plans can ensure that you’re getting the best deal.
Once you find a policy that works for you, make it work with your budget. That might mean cutting back on discretionary spending or tightening your belt in other ways. A budgeting app like You Need A Budget can help you keep your spending in check.
Pay off your debt
Buying life insurance to protect against debt isn’t enough. You also have to actually pay off your debt.
Paying off debt can be overwhelming. It’s easier when you have a budget in place. Having a system in place, like the snowball method, also helps. The snowball method involves choosing your highest or lowest debt, putting everything you have into that debt while paying the minimums on your other debts, and, when you’ve paid off that debt, you move onto the next highest or lowest debt, and so on.
Reevaluate your life insurance need
So you bought term life insurance to protect your family from debt...and then you paid off that debt...so aren’t you now paying for too much life insurance?
It seems like a catch-22, but you can avoid this issue with the ladder strategy.
The ladder strategy works by staggering the term length and coverage amount of several policies, rather than buying a single policy. So instead of buying a 30-year/$1,000,000 policy, you buy three policies, one of which expires every 10 years, for amounts totaling $1,000,000.
This has two benefits. First, because you’re buying smaller, shorter policies, you pay less, and can save up to half of what you’d pay for a single large policy. Second, you’re stepping down your coverage over the years, so as you pay off your debt, you’re reducing the life insurance coverage you have – and no longer need.
Having debt isn’t fun. Leaving your debt to your family, with no way to pay for it, is even less fun. If you have dependents, life insurance shouldn’t be put off, and having debt should spur you to look into it even sooner. Need help finding out what life insurance policy is right for you? Ask one of our licensed experts today, whether you’re debt-free or not.