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3 dumb reasons to buy life insurance

Bad reasons to take out life insurance

There's one very good reason to buy life insurance -- to replace your income and provide for your family if you die. But there are plenty of other reasons to buy, and some are questionable.

While every situation is different, and it's always a good idea to talk to a qualified adviser about yours, here are three reasons it might not make sense to purchase life insurance.

1. To pay off your debt after you die.

Depending on the type of debt, the amount of debt and the specific situation, buying life insurance to pay off debt might -- or might not -- make sense.

If you have up to $10,000 in credit card debt, for example, you might not need life insurance to pay your debts. Usually, unless you have a joint credit card or a cosigner, your survivors won't be responsible for paying your debt, though a creditor can go after your estate to get money owed. And federal student loans get discharged when the borrower dies, according to the U.S. Department of Education.

"For some debts, no one is stuck with them," says Kyle Winkfield, a financial adviser and managing partner of O'Dell, Winkfield, Roseman & Shipp, a wealth management firm. He argues that borrowers still should make sure their loans will be paid off at death.

However, if you have a mortgage, a private student loan, any loan on which a friend or relative cosigned, or a business loan, life insurance can be a great way to make sure you don't leave your survivors in the lurch.

For example, one of Winkfield's clients, who is in his 20s, bought $2 million worth of term life insurance for $890 a year because he had taken out a large business loan and was worried his wife would be left in a jam if he died. The policy bought the couple instant peace of mind. "It was a really good deal," Winkfield says.

If you're considering buying life insurance to pay off your debt, look at: how much you owe, the type of loan, whether your loved ones would be on the hook to pay it off, and other implications, such as whether a business partner could afford to buy out your share of the business, says Daniel Zajac, a Certified Financial Planner professional and life insurance agent.

"Life insurance is big when you get into business planning," he says.

2. To cover the cost of your funeral.

Watch TV, and you might think one of the main purposes for life insurance is to pay for your funeral. "You see it on the commercials all the time," Zajac says.

However, unless you have absolutely no money in the bank, paying for a funeral might not be the wisest reason to buy life insurance, he says. That's partly because a funeral is not a huge expense if you have some cash in the bank or other assets, he says.

In fact, the average funeral costs nearly $7,200, although that doesn't include the cemetery plot, headstone, flowers or obituary, according to the National Funeral Directors Association. According to Farmers Insurance, the cemetery plot can add more than $1,000 to the cost, while the headstone can add an additional $1,000 and flowers start at $200.

If you do want to use life insurance to cover the cost of your funeral, you have several options, according to Trusted Choice, an association of independent insurance agents.

One option is to simply factor in the cost of a funeral when you choose a life insurance coverage amount. Or, you could buy funeral insurance, according to Trusted Choice. There are two main ways to get funeral insurance: prepaying for a funeral from a specific provider on an installment plan or buying final expense insurance, a type of insurance with a low death benefit of $5,000 to $10,000, according to Trusted Choice.

If money is tight and it's important to you to make sure your funeral expenses are paid, life insurance could be a good choice, Zajac says.

3. To leave a legacy.

Do you dream of being remembered as the grandma who set up the grandkids to go to Yale University or travel the world? In fact, some people do buy life insurance solely because they want to leave an inheritance to an adult child or grandchildren, Zajac says.

But using life insurance to leave an inheritance isn't always easy or cheap. "'Can you really afford this?' is the first question," Zajac says. "It may be too expensive."

Usually, Zajac recommends term life insurance rather than permanent life insurance. Term life insurance covers you for a specific time period, usually 10, 20 or 30 years. If you don’t die within that period, your beneficiary doesn't receive a payment from the insurer. Permanent life insurance remains in force for your whole life if you keep paying the premiums. But a person at the stage in life where they're thinking about leaving an inheritance will be looking at much higher monthly premiums than someone just starting a family.

For example, according to, a 65-year-old in good health could pay more than $600 a month for a $500,000, 20-year term policy.

And if the premium payments are a financial stretch, you could pay them for years, hit a financial rough spot, be unable to keep up payments and have the policy lapse, Zajac says. Another issue is that, with a term policy, there's no guarantee you'll die before the term ends, he says. "That money might not even flow through to the beneficiaries," he says.

So, you could look at a permanent life insurance policy and compare that to other investment options, Zajac says. However, he adds: "I'm not a fan of life insurance as an investment."

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