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I'm the sole provider of a household of two - myself and my wife. I make enough to keep us both afloat, with a sizeable chunk of luxury on the side.

For practical numbers, I am a month away from paying off a student loan (less than $600 remaining) and one year into a 5-year car payment loan (about $8,000 remaining). My income is $4,100/Mo after taxes and health insurance (which is around $150/mo for both of us), rent is $1,300 a month (a bit higher than I'd like, but the neighborhood and quality of our home is well worth it).

The problem is - I'm the sole provider for our home, and if something terrible should happen to me, my wife would be stuck with our apartment lease and car loan with no practical way to pay it back (we currently have almost no savings). Which is why I'm considering life insurance.

Through our car insurance company, I can get $500,000 of life insurance for about $25 a month.

My question is - as a safety net for emergencies, is purchasing life insurance a practical investment(In the metaphorical sense)?

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    Make sure you also have an emergency fund. It took about four months for my wife's life insurance to pay out and that was just about the simplest possible case. – ChrisInEdmonton Jul 25 '18 at 20:28
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    “with a sizeable chunk of luxury on the side.“ + “we currently have almost no savings“ = you might want top reconsider your spending habits. – DonQuiKong Jul 26 '18 at 7:44
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    @DonQuiKong You hit the nail on the head. No savings, yet he takes out a 5 year car loan... earns upwards of 60k per year and yet is still renting... this guy needs to re-evaluate his spending ASAP. Mr Money Moustache to the rescue! – Cloud Jul 26 '18 at 9:13
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    Keep in mind that life insurance only jumps in if you die. There're plenty of bad things that might happen to you while you're still alive but unable to earn money. – Thomas Jul 26 '18 at 12:32
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    @Cloud: I agree with everything you've said, except the renting part. Rent vs buy is its own discussion, with its own conclusions. For example, I make 60k and rent. If I were to buy, paying a maximum of half again what I pay for rent(I live in an area with a relative abundance of apartments and very expensive houses) towards a mortgage (which would break my budget), I'd have to move to a less safe neighborhood two hours from work; I currently rent in a safe neighborhood, 30 minutes from work. It doesn't make sense for me to buy, and it may not for the OP either. – sharur Jul 26 '18 at 16:37
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as a safety net for emergencies, is purchasing life insurance a practical investment?

Life insurance is not an investment. It is a necessary expense if anyone depends on your income. You should expect to lose money on life insurance (otherwise, it means you've died).

You should absolutely get life insurance ASAP. If you were to die today, your family would be responsible for the debt and rent with no income.

A rule of thumb is to get 10 times your gross income in insurance in level term insurance. For you, it sounds like that would mean about $500K-600K. 10-15 year term insurance is generally relatively cheap, and you can renew it once it expires if necessary.

I would definitely shop around, though. $25/month seems pretty good but you want to make sure that you're getting the best rate you can.

  • Comments are not for extended discussion; this conversation has been moved to chat. – Ganesh Sittampalam Jul 26 '18 at 20:29
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    "your family would be responsible for the debt " can't only the estate be held liable? – Michael Jul 28 '18 at 1:46
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    Specifically, you want "term life insurance" to cover the emergency of your death. For emergencies, you want an emergency fund in a liquid account of some sort. – pojo-guy Jul 28 '18 at 5:26
  • @Michael The wife likely co-signed the car loan, apartment lease, etc. – kuhl Jul 29 '18 at 1:24
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    @kuhl What would the point of her cosigning be if she has no income? – Mast Jul 29 '18 at 10:50
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Life insurance is the perfect emergency safety net if your family would need a safety net in the emergency of your death.

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    This answer is indeed an answer – Azor Ahai Jul 25 '18 at 22:24
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    Life insurance is not an "investment" you make for yourself. It has a specific purpose and solves a specific need and that's all it does. It is not My question is - **as a safety net for emergencies,** is purchasing life insurance a practical investment? unless the emergency is your death. So I stand by my answer, fee free to downvote :) – quid Jul 25 '18 at 22:53
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    This is one of the funniest answers I've read on money SE xD – Cloud Jul 26 '18 at 9:16
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There are two common types of life insurance, term and permanent/whole. Term life insurance policies have no payout if you don't die during the term of the coverage, they are just insurance. Permanent life insurance is both insurance and an investment vehicle, but for the majority of people it is not a wise investment.

It's prudent to carry term life insurance if others depend on your income. You may also want additional long-term disability insurance in case you become unable to work. Not investments, but worthwhile expenses.

Definitely do some research/shopping, not all term-life policies are created equal.

  • It depends on when the account was created and under what policies. The one associated wtih my small (100k) policy my parents took out when I was 18 has an associated savings account that pays 6% and is basically cash just sitting there. Interest pays premiums (about $350/yr) and I'm "a little" over funded so I actually get an extra $500 or so per year growth on it. I can take the entire savings fund out at any time, no penalty, etc. I just gotta start making the monthly payments for the policy. – ivanivan Jul 27 '18 at 1:36
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    How much are the monthly payments? – Kevin Jul 27 '18 at 13:08
  • @ivanivan Wait, why do you have to start making the monthly payments when the interest already pays them? – Michael Jul 28 '18 at 1:47
  • @Michael if I withdraw the $13k-ish in cash that is sitting there generating the interest that makes the payments? Sorry, bad grammar may have gotten the best of me... – ivanivan Jul 28 '18 at 2:14
  • @ivanivan Sorry, guess reading comprehension got the better of me, I missed the part about taking the entire savings fund out. – Michael Jul 28 '18 at 20:47
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as a safety net for emergencies

Well, no. There are more emergencies than death.

Yes, you need life insurance. There are a number of rules of thumb, but 10-20X your income is the range. The higher end for a wife with no income and kids, the lower end if just the wife. $300/yr for $500K is term, and whatever you do, I'd stay with term.

More than that, I'd look to the usual things to boost your security, e.g. the emergency savings, and starting to save aggressively towards retirement.

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Life insurance is not "a safety net for emergencies". It's for one single situation, where you die. Doesn't do anything if you're for instance merely seriously disabled and unable to work.

In your situation, I would say that having life insurance is a good idea. However, $500K is not going to be sufficient to support your spouse indefinitely at your current standard of living. (I'm assuming from context that you're in the US.) A better plan would be to get your spouse into a position where she can support herself (and perhaps you in the event of disability).

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    and as part of that better plan, get term life insurance in the meantime, because you almost certainly can't get your spouse into such a position overnight and you never know when you'll be out of time. – Paulpro Jul 27 '18 at 23:09
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Life insurance is not an "investment" anymore than car insurance is. It's insurance.

I don't know how old you are or whether you plan to have a family, which is relevant. But term life is much cheaper than permanent ("whole/universal/variable") insurance.

Since You don't have kids at the moment, I assume your wife is also young and healthy, and can probably support herself and probably be released from the lease if you die. I'm not sure you need any life insurance at this time, other than possibly a small one for funeral expenses.

First, fix your budget because you earn too much to have no savings and no home ownership (while owning a home may be debatable in some cities, I'd still own something somewhere as an investment).

If you still decide to get a policy, invest the difference between term insurance and the cost of "universal/variable/whole" life (which agents WILL try to sell you), in "a ROTH IRA, or a 401k at your job if they match some of it - because that's free money", (per Suzie Orman).

If there's no 401k or if you maxed out the amount that's matched by your employer, then the ROTH IRA is the best vehicle for investing and arguably for some or all of your emergency funds. That's because ROTH IRAs allow you to withdraw without penalty, and so it's not insane to use that for your emergency savings plan so it can earn something and grow for you.

Advisors want you to do both the long term investments and short term cash at hand, and that's obviously better! But given your present habits, I'm not sure how realistic that is.

So if I had to choose between having 6 months of savings in a CD that I pay taxes on for the meager earnings it yields, OR investing in a ROTH IRA, I'd prefer only having 2 months of savings that are liquid, and a fully funded ROTH IRA. I can use the ROTH "in an emergency" without any tax issues, which grows for me all along the way and has no tax consequences.

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No, it is not totally "foolproof". You could still get so sick you are not able to work, but without dying. Since the life insurance won't trigger until you have died then maybe you will have medical bills and lack of income while you still live on top of it all.

But if you live in a country with socialized healthcare you should not have to worry about that scenario too much.

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