Should I Get Life Insurance, Disability Insurance, and Renter’s Insurance?

Most educated people know at least a little about the clusterf*ck that is the U.S. health insurance program. But what about other kinds of insurance? Which ones are worth getting, and how do your circumstances affect that?

Should You Have Life Insurance?

Term life insurance pays your family or other designated beneficiaries a lump sum payment if you die. Obviously, that’s not a fun topic to think about, but unfortunately, early death in the US is discouragingly common. The World Bank estimates that only 80% of US men and 88% of US women lived to age 65, and in fact, US life expectancy was stagnating well before COVID struck. When my father passed away with minimal retirement savings, I was grateful that he carried high levels of life insurance, meaning my retired mother wasn’t left financially destitute alongside her bereavement. So, as depressing as confronting your own mortality can be, it’s worth thinking about, and sooner than you might think.

You can get term life insurance from lots of brokers, but if your university offers a life insurance program, there’s a good chance it’s a better deal than what you’ll find on the open market. (But you should comparison shop anyway to make sure.) Usually these options will be expressed as a multiple of your salary as a lump sum benefit available to your survivors, and you’ll have your choice of multiples (with monthly premiums roughly proportionate to the multiple and your income).

You should also note that many employers include a free, modest life insurance benefit. It’s probably just enough to cover your funeral and estate expenses. For instance, my own employer includes $50,000 in free life insurance benefits. Having no dependents myself, I’ve decided that’s plenty for me — if I die, my beneficiary will be getting an unexpected lump sum in the form of my retirement and other cash accounts. But lots of people’s circumstances mean they may very reasonably make a different choice than I currently am.

Who Should Get Term Life Insurance? How Much?

Whether I would purchase life insurance would depend on several circumstances:

  • Dependents: If I had dependents, especially children living at home, I would be much more likely to purchase life insurance. Without dependents, you probably do not need life insurance, except perhaps a very small benefit to cover end-of-life expenses if your employer doesn’t automatically offer that. If you do get it, you can think of it as a farewell gift.
  • Wealth: The wealthier you are (especially cash, easily sold investments, and equity in your home), the less likely you are to need life insurance, and the less insurance you need if you get it. I’m assuming here that your goal is to ensure that your beneficiaries’ basic and mid-level needs are covered.
  • Age & Health: The older/sicker you are, the more likely you are to die, but also the more expensive life insurance gets, because actuaries are good at their jobs. The expected value of the decision probably won’t change much across the age and health spectrum, but the higher risk it will be used may make you rationally more likely to choose insurance if you are older or ill (if you can still get it).

How much life insurance should you get? I think that also depends on a few things:

  • Your partner’s earning potential (if present): If your partner either earns a high wage or has the human capital / privilege to command one, you may not need as generous of a life insurance policy because they could support themselves and any dependents pretty easily.
  • Your family’s resources (and likelihood of sharing them): I’m not saying you should free ride on the rest of your family, but all else equal if your interest in life insurance is to avoid leaving your dependents destitute, having a family with more resources and who are more generous to you and your family should make you more comfortable getting low-to-intermediate life insurance multiples.
  • Your wealth: See points above.

So, the fewer dependents you have, the lower their earning potential, and the less wealthy/generous your family, the less life insurance you probably need.

What about Whole Life Insurance?

Don’t do it. It’s much more expensive, more complex, harder to get out of, and the ability to borrow against it isn’t worth these substantially increased costs.

Disability Insurance

Disability insurance comes in two flavors:

  1. Short term disability insurance: This covers disability lasting <6 months.
  2. Long term disability insurance: This covers disability lasting >=6 months.

If you are healthy, taking care of your finances, and have a TT position at a US university, you probably don’t need short-term disability insurance. Short-term disability insurance often has very high premiums, and it’s not really necessary for two reasons:

  1. You should have a 6-month emergency fund anyway. If you lose your income due to disability lasting <6 months, this is exactly the scenario that emergency funds exist for. It’s effectively a form of self-insurance for this and many other unfortunate situations. Plus, you can earn a positive return on your emergency fund (in a high-yield savings account, money market account, CD ladder, etc) in the mean time rather than paying an insurance company exorbitant premiums for effectively the same thing.
  2. You often won’t lose your income if you experience short-term disability anyway. If you’re on a 9-month appointment, don’t teach in the summer, and your back goes out on June 1, for instance, you have 2+ months to recover without loss of income. Same goes for winter break. If you have an issue during the semester, often your class can be covered on a short-term basis without loss of income, or you could switch to a Zoom-based class format temporarily if you have a short term loss of mobility (as I did when I experienced a bulging disc issue). In short, there are often ways to adapt to short-term disability situations in a university setting.

On the other hand, long-term disability insurance is often a good idea, especially early in your career / before you’ve established financial independence. The reason is the same as for term life insurance: bad shit happens. Sometimes the bad shit will kill you (in which case your dependents will be grateful you had term life insurance), but sometimes it will just restrict your ability to work long-term (in which case you and your dependents will be grateful you had LTDI). Plus, the costs of long-term disability insurance usually are usually pretty reasonable.

Renter’s Insurance

It’s required to have home insurance if you have a mortgage, and same for auto insurance if you have a car, so I won’t cover it here. However, renter’s insurance is highly underused and makes a ton of sense for most people who rent their home (which is often a great idea!). Premiums are usually very affordable, and you’ll be covered if your personal property is stolen or damaged, if others are hurt in your residence, if you have to move out of your home due to damage, and lots more.

Discover more from Elbow Patch Money: Personal Finance for Academics from Grad School to Emeritus

Subscribe now to keep reading and get access to the full archive.

Continue reading