There are a lot of really good reasons to have a life insurance policy, no doubt.
If you have children, they're dependent on your income. You want them to be taken care of should something ever happen to you. If your spouse stays at home with the kids, he or she is dependent on your income. If you stay home with the kids, your spouse is dependent on your “childcare services.” (Obviously, you're more than just a service provider when it's your own children, but should something happen to you, your spouse would have to pay for childcare, which, as most parents can tell you, isn't cheap.)
Those are just a few examples of why life insurance might make sense.
But often when I read or hear pitches for life insurance policies, the writer and/or salesperson brings up other reasons why life insurance is important that I'm not so sure about. Reasons like:
Funeral costs. If something happened to you, how would your family afford your funeral?
Loss of income from grief. How much income would your spouse need to take off from work to recover from your loss? And what would that cost them in terms of salary?
Making the mortgage payment. How would your spouse afford your current house payments and bills without your income?
But are those always good reasons to have life insurance?
For funeral expenses, the national median cost of a funeral in 2012 was $7,045, according to the National Funeral Directors Association. Cemetery services can cost an additional $3,000, so let's say $9,600. (Cremation, which is growing in popularity, is significantly less. The average cost of cremation is about $1,600, ranging from about $1,000 to more than $5,000, depending on additional services purchased.)
So, for me, covering funeral expenses doesn't seem to be a good reason for a life insurance policy. It seems like funeral services are something that could be covered by a solid emergency fund, especially since my family is well aware of my (inexpensive) wishes.
Okay. So what about loss of income during the grieving period? That seems reasonable. After all, it takes time to find a new normal after a tragic loss.
Here's one example of advice from a “life agent and financial adviser” who says that a parent should get life insurance to cover salary losses during bereavement:
“It is hard enough to think about losing your spouse to an untimely death. Now try to imagine how much time you would need to grieve for the loss of one of your children. How much time would you need to take off from work? How much would that cost you in the form of your salary?
“…I am a husband and father first, a life agent/financial adviser second. I have over $1.2 million of coverage on my 2 1/2-month-old son … I pay $7,000 a year for 20 years at which point I don't have to pay a dime ever again in premiums, no matter what. It is a fully paid-up policy.”
But I have to wonder, how much time could someone really take off of work?
Maybe you could use vacation time, if you have it; but that's typically paid time off, so no loss of income there. And some companies do offer unpaid bereavement leave, but it's usually only three days. After that, it seems like you're looking at an extended leave of some sort, or you'll have to quit your job (or else get fired, if you're taking off too much time). Most people just can't afford to do that, no matter how much they might be grieving.
Finally, there's the “paying the mortgage” argument. Some advisers say that if you and your spouse buy a new house, you should have life insurance to help them make the house payments should anything happen to you. In some instances, it does make sense. Maybe you have a spouse and children and you don't want your death to put them out of their home.
But let's say you're married and don't have children. Would your surviving spouse even want to stay in your home? It might be too painful. It might be too much house for just one person. It might make more sense, financially and emotionally, to sell the house and downsize. And in the meantime, to make ends meet, isn't this where the emergency fund comes in?
It seems like owning a home with someone isn't necessarily reason enough to buy life insurance.
I'd really like to know what the GRS audience thinks, though, because it's entirely possible that I'm missing something here! Do you think that funeral costs, loss of salary due to bereavement, and mortgage payments are good reasons (and reason enough) to buy a life insurance policy?