YNAB BLOG

Should this single 23 year-old be paying for a million dollar partial whole life insurance policy?

magnifying glassEric is a 23 year-old recent college grad living in a snowy part of the midwest. He graduated high in his class at school and landed a good job the month after graduation – but the education didn’t come cheap. He left school with close to $70,000 in debt ($64,000 student loans and a $6,000 credit card balance).

He knew he wanted to get out of debt quickly, so he moved home with his parents, started his job, and began attacking his debt. In the last year he’s paid off close to $20,000 of his loans.

Here’s Eric’s debt breakdown:

Loan Balance Interest Rate Payment
Student Loan 1 $3,379.99 6.8% $50
Student Loan 2 $22,753.25 6.8% $283.10
Student Loan 3 $3,548.74 3.3% $27.59
Student Loan 4 $7,125.59 3.3% $55.39
Student Loan 5 $5,474.10 3.3% $42.56
Student Loan 6 $3,583.90 7.25% $35.14
Credit Card $4,556.83 17.99% $114*
Totals $50,422.40 $607.78

*Assumes a minimum payment at .25% of balance. He pays much more than his, as you’ll see in the budget.

Looking at his budget, may find yourself envious of the simplicity (or maybe that’s just me). Eric currently takes home about $3,100 per month. His health, dental, and vision insurance, as well as $200 per month in 401k contributions, are handled through withholding.

Category Budgeted Notes
Monthly Bills
Cell Phone $70 Uses 1.5GB of data per month, 500 texts, not a lot of talk time. Trying to get work reimburse a portion of phone bill.
Vehicle Insurance $75 Owns a car and a truck. Uses the truck for winter and mountain driving (he’s an avid outdoorsman), and the car for work commuting. No debt on either vehicle.
Life Insurance $204.79 Blended term/whole life policy. $180k in whole life, $820k in term coverage.
Monthly Bills Total $349.79
Everyday Expenses
Groceries $500 Just started a new diet plan that involves purchasing some of his meals. Knows he’s probably estimating high in this category.
Gas $200.00 Lives some distance from work.
Spending Money $40
Restaurants $75
Everyday Expenses Total $815
Debt Payments
Credit Card 1 $1,441.77 Obviously includes his large snowball payment, which he told me reaches $1,500 to $1,600 some months.
Student Loan Group 1 $333.10
Student Loan Group 2 $160.68
Debt Payments Total $1,933.55
Budget Total 3,098.34

Eric’s a new budgeter, so his main goal is getting the community’s take on his spending plan and see if there’s any way he could accelerate his debt elimination even more. His current plan has him debt free a little over three years from now. He has no buffer or emergency savings.

My Take on Eric’s Budget

I told Eric he needs to add a few categories to make his budget more robust and realistic:

  • Personal Care/Toiletries – he told me this currently comes out of ‘Spending Money.’ Might be fine to keep it there if he doesn’t feel squeezed with his current spending money category.
  • Clothing – work costuming costs money, as does the outdoor gear he uses for his hobbies.
  • Gifts – he lives with and near family, I have to imagine birthday and holiday giving come up.
  • Car Maintenance – with two vehicles, stuff is going to break.
  • Car Replacement – make payments to yourself now so you don’t have to make them to a bank later.*

*I don’t know the mileage or condition of Eric’s cars. If they’re running well, and if he sets aside money for maintenance, I’d hold off on the car replacement category until the debt was gone.

As far as  a “buffer” goes, Eric could take his next two snowball payments and have a full buffer. His debt-free date would barely be affected, and he’d have the peace of mind of a little cushion in the bank. Because he’s already proven his ability to keep up with this amazing debt elimination plan, I’d recommend (in his particular set of circumstances) building the full buffer and then jumping back on the debt.

If this were my budget, I’d free up money for the new categories in two ways:

Drop the grocery spending by at least $200 per month. I’m glad to hear Eric’s working on a healthier food plan, but I can’t imagine he’ll need $500 per month to feed himself. It seems like he could eat nothing but fresh produce and high quality protein for much less than that. Eric, see how it goes with $250 or $300 per month in the groceries department.

Drop the whole life insurance policy in favor of straight term. For the record, Eric has this policy on himself because his parents co-signed on his student loans. If something were to happen to him, he doesn’t want them left with the bill. Very responsible, I’d say.

The issue here is whether a single 23 year-old needs $1 Million in coverage at all, let alone that kind of coverage with a partially whole life setup. I’m not a life insurance expert, so I’ll happily let commenters correct me on this subject. My understanding is the baseline number for life insurance coverage is ten years’ gross income. If I’m making $40,000 per year, I want $400,000 in coverage.

Even if we took that as a baseline and added the current outstanding debts, we’re only at $450,000. But…since Eric’s only real concern is protecting his parents from paying off his debts, why not start there? Get a $50,000 term policy with a 10 or 20 year term and call it good until he has a family of his own to protect with a bigger policy.

The savings would likely be $150 to $175 per month without (in my opinion) any real lost benefit.

Eric, as I said to you in our email exchange, you’re on a great path. Add those few categories to your budget, stick to it, and keep hammering on that debt. You’re doing great, and three years from now you’ll be in amazing shape with no debt and a great income.

Now, let’s see what the commenters have to say about this life insurance policy.

*I warned Eric that personal finance enthusiasts typically loathe whole life insurance policies, so he should be prepared to hear some, um, enthusiastic comments. He said that was fine with him. 

46 Responses to “Should this single 23 year-old be paying for a million dollar partial whole life insurance policy?”

  1. Eric Williams

    I’ll echo Mark’s action Plan:

    1. Adjust the life insurance: Even if you wanted to be conservative and get the $450,000 term life policy, it’s going to save you at least $150 per month.

    2. Cut the Food Category: Again, conservatively, you could easily live on $300 per month. My family of three (and we like to eat out a lot!) gets by comfortably on $600 per month.

    3. Buffer: Sticking with the conservative estimate- building that up should give you great peace of mind and stamina to kick the debt in the pants!

    Regardless, if you simply keep doing what you are doing, you have a baseline and know when your debt will be gone! Keep tweaking, and tinkering and it will sure to cut more time off.

    Reply
  2. marienevada

    i absolutely agree on the life insurance. Whole life insurance is a waste of money. A long time ago it would have been fine because a part of that premium was invested for retirement but this was long before people could do that themselves. As far as I understand, you simply don’t get the kind of returns you can get yourself with other options.And since he already contributes to a 401K, it’s not necessary right now. Term insurance insures that Eric pays only for what he needs. An insurance that if he dies, his parents have money to pay off his loans. If that’s what he wants, the insurance really only needs to be for what he owes on his loans and should be re-examined every year as he pays off his debts. Life insurance on someone with no dependents is a waste of money.

    As for the groceries with the pre-purchased meals: from a lifestyle/diet point of view, that won’t help in the long run. I’ve struggled with my weight and have tried the prepurchased route and it’s no good. You don’t learn to feed yourself. I suggest Eric reads a good basic nutrition book, that is not hyped nor focused on eliminating “bad” foods. A book such as “Burn the Fat, Feed the Muscles” by Tom Venuto is excellent.

    Prepurchased food is a waste of money, and not that nutritionally excellent.

    Reply
    • Mike

      I think it depends on the plan he is on. If it is a plan like nutrisystem then I agree. However if he is doing medifast through a medifast center, I have been very successful with that plan which incorporates their medifast meals with your own lean and green meals while you lose the weight and then for 12-16 weeks after you lose the weight they help you convert to only your own meals. Then for a year after that they have weekly consultations with you to help you get through challenges that come up everyday. I do not know what diet plan he is on or even if it means that he is pitching in on food while living with his parents because of eating more produce and good meats.

      Reply
      • Emlyn

        How much did you pay for your Medifast meals? I have family on that plan (um, including a brother-in-law named Mike…?!) and they paid more than $350 for the 5 branded meals (just starting out, which it sounds like Eric is doing) plus they have to buy groceries for their other 1 “lean and green” meal. If he’s factoring in that amount to his “grocery” budget, plus accounting for lots of lean meats and fresh veggies, I can see him hitting $500 a month. I think he should keep his high estimate for now and see what reality is for the next couple months.

        Just for simplicity, I budget my personal care/toiletries in with my grocery category, since they usually come from the same store.

        Yes, add some for clothes and gifts.

        Potential car repairs could come from an emergency fund or buffer if needed.

        Reply
        • Mike

          I pay 250 for 4 weeks of meals. I do it at a medifast center and you can bring in a coupon to get 67 dollars off of 250 dollars or more so when you buy 3 weeks worth of meals at a time it works out to be $250 for four weeks. Then lean and green meals added in I stick around 350 to 400 a month. I was able to pay for the initial invest for the program, which is a cost to use the center and have the weekly visits with the counselors, with my HSA because it was deemed medically necessary by my physician.

          Reply
  3. bfulop

    Maybe it’s just me, but I never see in your examples that people budget for vacation. Here in France it would be the third or fourth on the list.
    Anyway I really love your posts, I always read them all!

    Reply
    • wc11472

      A lot of jobs here in the US don’t offer much in the way of vacation time; maybe 10 days a year if you’re lucky, and often that has to cover everything from sick days and time off for doctor’s appointments to actual vacations. People in those situations don’t usually budget for vacations because they just don’t have the time or wherewithal to take them.

      Reply
      • Susan C.

        Yes that is the truth in America. Vacation for a good portion of us?? What is that?? Particularly if one is self-employed, for the most part, as I am. Then we work 7 days a week.

        Reply
      • lalaJ

        Wow this is so weird for me to read! I’m from Trinidad and Tobago an island located in the Caribbean, we have 16 holidays plus with your job you get 14 sick days, 15 paid vacation days and 5 personal days. Personally I think its too much since your actually away from your job and not too productive especially around key holidays like Carnival, Easter and Christmas but I guess that’s our culture. I’ love to experience working in the US or China, Russia etc just to see how the other half lives.

        Reply
    • MrMcLargeHuge

      This baffles me as well (I’m American). The post from a few days ago detailed a couple who simply put their vacation on their credit card. It doesn’t make sense to me, but perhaps that’s many are doing?

      Reply
      • Eric Williams

        Vacation: Good point. I think even if you don’t have anything major planned, I would suggest building in a few celebratory events along your debt free journey.

        That will help keep you motivated and avoid burnout.

        Reply
        • Akip

          I have to add, at 23, it is likely that a lot of friends will be getting married in the upcoming years. Attending weddings can be expensive, and if you don’t want to miss out having a vacation/weddings category will help out! :)

          Reply
  4. Celia

    quick question please from re Eliminating Debt. On a previous post that you have a link from here
    1st Mortgage $1,109.49 3.99% $760.32 the last figure is the interest paid for that month how did you work this out please? I cannot for the life of me work it out?

    Reply
  5. Laura

    My partner & I live in a city, eat obnoxiously healthful/organic foods, and feed ourselves on $300-$350 a month. Our eating out spending is on par with Eric’s (about $120-$150/mo for two of us). So I’d think Eric can get that number way down without losing anything valuable in terms of diet. I have no experience with prepackaged meals, but my experience is that weight loss, health, and budget actually go hand in hand when you make the switch toward buying and eating whole foods (i.e. fresh veggies, rice, raw nuts) instead of prepackaged anything (i.e. Ragu, Uncle Ben’s, Planters Snackerzz with Extra Honey Topping!) It does involve cooking. I had the biggest mental block against cooking, and it turns out it’s not that hard. Just pick a couple of simple recipes to start. Anything you like, make it over and over until it becomes routine and you don’t even have to think about it.

    Reply
  6. Stepan

    I dont know how it is in the states with loan terms, but i would also advise to pay-off the highest interest loans first. That means
    1. get rid of the credit card
    2. Payoff Student loan 6 (7.25% interest)
    3. Payoff Student loan 1 (6.8%) + loan 2 but it has substantial amount in it

    i bet you are smart graduate :) you can do nice excel simulation to see benefits :)

    Reply
  7. Bob Bucy

    A single 23 year old has no need for $1 million of life insurance. He could provide for payment of his student loans and burial expenses with $100K of term life insurance for probably less than $20 a month unless he has some health issue that wasn’t disclosed.

    Reply
  8. Johnny Thomas

    Whole life insurance can be structured properly to be a safe bet and we use it as a product called LifeBank. BUT, it HAS to be structured properly. Straight WL is too expensive. For this plan, you can use LifeBank to pay off his debt in the same time, AND if you used a properly structured WL policy you could have money in the bank left over without paying extra. We run debt plans like this all the time, and if you use LifeBank you can pay it off in the same time and still have money left over and the money is never at market risk like a 401k (401ks are at risk and are proving not only ineffective but very risky). However, if you don’t use it properly, getting cheap term is much better. A 23 year old in good health will pay $17 a month for a 10 year term policy at $500k in death benefit, or for a 20 year it’s $27 a month. Just my two cents.

    Reply
  9. Rachel

    Federal student loans, Sallie Mae, and Wells Fargo student loans are forgiven if the borrower dies, regardless of co-signer. At least mine are. He should call his lenders/look it up on his lenders web pages, document it and keep a copy of it with his student loan file (and tell his parents where he keeps this file). He could then go without life insurance for now.

    Reply
    • Johnny Thomas

      I think you are right on the student loans, but while term is so cheap right now, why not take out a policy to cover him that is very inexpensive. Sometimes we think our situations are static, but he’s 23 and will probably get married some day, even have kids. If he gets cheap term now, he doesn’t have to worry about it when his situation changes in the future. Static financial planning leads to a lack of vision. Do you agree?

      Reply
      • Rachel

        I do agree, if he wants a term policy locked in now so he can get lower rates that’s one thing, but to be spending $204.79 a month on his policy just in case he leaves his parents with that debt doesn’t seem like a good plan. My husband has a term policy for the same coverage and it costs $30. Mine is $25, he could be using the extra $150-175 to speed up his debt snowball. Also, he should shop around for his coverage. Every few years we call SelectQuote just to see what kind of rates we could get. Last year we renewed a 20 yr term policy with a new company and saved $30 a month plus reset our 20 yr time frame.

        Reply
    • Tim

      While you may have a point I think Eric is being more responsible by paying off the loans. Sure they may be “forgiven” but that just means the rest of us are effectively eating the cost. I would have less sympathy if a credit card company/bank doesn’t get paid upon death but public funds should be paid back if they can be. With a smaller policy and dropping the whole life it will not impact Eric’s getting out of debt much and everyone gets gets their money.

      Reply
      • Emlyn

        Rachel, I was wondering about student loan forgiveness with the co-signers as I know my husband’s loans will be forgiven if he passes away (no co-signer). I don’t think that means Eric wouldn’t continue to pay them off, Tim, but if he can drop some life insurance coverage (but keep some “cheap term,” as Johnny suggested) at this point because of better peace of mind, then he can pay them off even more quickly. These were great comments!

        Reply
        • Tim

          Agreed but he’s in his 20′s. If he takes out a policy that’s just large enough to bury him and cover all his outstanding debts (so roughly 100k maybe 150k) his monthly premium would be $20 a month at most (1/10th what he is paying now) so he could have a policy that would pay everything upon his death while being extremely affordable and still crushing his debt. :-)

          Reply
    • Tim

      My company has a group life that doesn’t cost me anything but it’s only 1x my salary and I have a family. Given Eric’s take home pay I’d guess he’s grossing 45-55k? which wouldn’t be enough to clear his debt, however he can get a much smaller policy if he factors that in when dropping the limit.

      Reply
  10. Charlotte

    Does he have life insurance at work? A lot of places offer an automatic 1x salary, which would likely be enough here.

    Reply
  11. Renee

    Eric, I think you should set aside a category called rent to your folks. Even if they’ve agreed to let you live there for free, it does cost them more to have you there in utilities and such. A small token would go a long way … my humble opinion.

    Reply
    • Emily

      I agree Renee. Even something in the newly created gift category would work. Buy them one of those monthly meat deals or treat them to a night out often with a stock of varied gift cards or something. Generosity and frugalness are actually a really good pair although it usually takes some effort to learn since all of us are usually one or the other. If someone sees that you don’t eat out yourself often but you will buy them a restaurant gift card it shows that you value them even more than yourself. Don’t be frugal to the point of being a cheap-wad. Sure you’ll be debt free faster but you’ll want someone to like you enough to celebrate with you when you are debt free.

      Reply
  12. Jordan

    If he is healthy, even a $450k 10 year term life policy is going to cost him less than $20 per month. I am a life insurance agent so I actually just ran the numbers. I am not licensed in most of the Midwestern states as I live/work in CA but I am licensed in a few so I still know the markets well.

    The problem with most life insurance through work is it is generally not transferrable so you can’t take it with you if you leave. That also means with many companies, if you get sick and have to leave work, your life insurance is gone.

    Just some insight from a life insurance agent…

    Reply
  13. Robert Jacobs

    This young man doesn’t have anyone relying on him for income such as a wife or kids. Therefore, he does not have a need for life insurance whether it s term o whole life. Just pay off the debt and begin building wealth.

    Reply
    • Kenny Akridge

      Absolutely agree with this. Life insurance is meant primarily as an income replacement. In the .000001% chance he dies in the next 2.5 years (based on continuing to pay 20k a year), 50k in term insurance is sufficient. Take the difference and apply it to the debt payments. Life insurance as an investment is typically a horrible idea (no offense life insurance agents out there, but I did say “typically”) and should be considered after maxing out other tax preferred options, company matches, etc. Find a new insurance agent too. They should have never advised this to a 23 year old with no dependents.

      Reply
  14. Right track?

    Whole Life is a HORRIBLE rip-off. The premise is an insurance plan that builds cash value “savings”. The problem is that they are built with very expensive life insurance and very low-yield savings. for the first 3 – 3.5 years, your account builds no cash value. Those payments go to the agent’s commission and various fees.

    Then the policy only pays out one of the 2 items. If you die, the policy pays out the face value (or the insurance piece). The company keeps the cash-value portion! If you survive the policy, it pays out the savings (which, as we recall, is low-yield). The amount that is in there will likely be worth less, given inflation. Again, a horrible product.

    Insurance is good as it transfers risk. But it is unwise to combined insurance and savings/investments.

    Reply
  15. thesavvybookgirl

    Grocery: For one person you should be able to lower the grocery budget. I feed a family of 4 on about $900/month but that amount also includes our toiletries and any paper/cleaning goods.

    Whole Life is a waste: At the start of our journey we canceled ours and took the 16K we had built up in cash value and started our debt snowball and have not looked back since. Get yourself a good 10 or 20 yr. term policy that is about 10X your annual income. You can beef it up later when you have a family counting on your income.

    Student loans: If you have federal loans you might also consider consolidation since some of them are in the 7% range. It might make that payment cover a tad more principal if they are all around 3%.

    Reply
    • Right track?

      My wife shops for 8 on 350/month (just recently up from 300). She is quite the bargain hunter. I have tried to convince her that we can put more money into the grocery envelope, but she simply won’t hear of it…

      Reply
  16. Susan C.

    About Eric’s student loans: If they are subsidized by the federal government, or just government loans (not private loans from a bank, and if students were smart from the beginning, they would never fall for the private bank loans), then those loans are cancelled upon his death. Some Aflec sales rep was trying to tell me a few years back that I needed her supplemental insurance due to then student loans, in case I get sick or something happens. I told her that is why student loans have forbearance, medical deferments, even the possibility of cancellation due to disability. So, no employees needed to consider Aflec for that purpose. And, due to those “perks” with federally taken out student loans, that is the last debt I would ever repay. Work on those currently that must keep being paid even if you find yourself out of a job or ill. But, many people always talk about their student loan debt and never have an issue with their mortgages or “equity” mortgages. Just imagine what our economy may have been the past five years had more people bought into the American Dream being an education instead of a home.

    Reply
  17. Kay

    In Australia our equivalent of a 401k, called superannuation, usually comes with life insurance, or a very low cost life insurance option. Just thought it might be worth checking. Sometimes people have taken out insurance when they are already covered.

    Also, if something happened to him, presumably the 401k money would be available to his parents, if they are the nominated beneficiaries. If there was enough in there to cover his debts, then there would not be a point to the insurance.

    Reply
  18. Charlie

    I beg to differ with most of you. As a financial advisor *and* someone who has mostly term insurance, I’d recommend he keep his life insurance permanently. His premiums will never go up, and $200 when he is in his 40′s will be nothing in light of a higher income and a family of his own.

    The 50+ yo prospective clients I meet often did not reach their financial goals (70%+), and are afraid they will be destitute by the time reach retirement age..or worse, die at 65, with no life insurance (since their term lapses by then), and their spouse is left destitute. WELL…what if they had permanent life?

    Dave Ramsey fans abound here. Good for you, and best of luck, but what if you don’t reach your goals? What if at 65, a 2008-like stock market crash takes place? What if you need long-term care? What if your spouse needs it?

    Here’s food for thought. When doing the Monte Carlo Scenario with Dave Ramsey’s retirement plan, at 5% distribution, people ran out of money on an average of 16 yrs. (Google it).

    Personally, I pay $228/month on a $1Mill term policy b/c of my health condition. Had I gotten it in my 20′s, that same $1mill perm/term would’ve been $158/month when I was healthy, and the death benefit would’ve grown to $1.5MM…and I don’t have make sure I die by 65 in order to protect my wife.

    Reply
    • Nick

      Your first paragraph is reason why I am not canceling my 1mil policy.

      I currently pay $200 for 1mil whole life policy. The rate stays same for 100 years. I have to pay 200$ month as long as I live.

      Advise if it’s right decision to keep going or not.

      There are some policy that say pay for 30 yrs then your policy is paid off but mine is 200$ every month for rest of my life (100yr)

      Reply
  19. Right track?

    Okay Charlie,

    First, a $1M term insurance policy, while you are young (and hopefully healthy), should not be over $100/month. Plus, while true that his premiums will never go up, his savings (attached to that policy) will not go up much, either. And the logic ($200 will be nothing in light of a higher income and a family of his own)? This is your advise, as a FINANCIAL advisor? WOW…

    2nd paragraph…so you sell your product based on fear…. The 50 yo prospective client has options that don’t involve this horrible financial vehicle (known as Cash Value insurance). A 50yr old male can still get term insurance for a respectable rate. Life insurance is not meant to be a permanent thing. it is meant to transfer the risk of the surviving spouse (and/or kids) loosing your income. Once you have paid off your debts and your kids are gone, that risk is reduced.

    It’s really simple…live on less than you make. Don’t buy stuff you cannot afford (ie have to make payments for). Say no to things now, so that you can say yes later. Delay gratification. Adopt a crockpot mentality when it comes to money and investing. Be content with less and value the intangible more. Give first, save second, spend third.

    If you have $1M in retirments in good GrowthStock Mutual funds, with a 12% rate of return for the Life of the Fund (LOF), which have a track record of 5 – 10 years or more, then basic math says that you can withdrawl 8% a year ($80k/year) without touching the principal (assuming that inflation stays around 4%. If inflation rises, or the rate of return goes down, you adjust your lifestyle and distribution accordingly. Keep in mind, if you follow SOUND financial advise, you will not have ANY debt. Your single greatest wealth-building tool is your income.

    Reply
  20. Marily

    I agree with others who have mentioned a small term life insurance policy. All he needs is maybe $100k to cover the student loans and burial/funeral expenses. Anything over that is really unnecessary until he has any dependents. If he is really liking the cash value aspect of the whole life policy he should take the difference in premiums and invest that money instead. He will be getting a lot more for his money that way.

    Reply
    • Deborah

      I agree that whole life, unless properly structured, is a waste of money. However, maybe we should ask why Eric thought that a $1Mil policy was appropriate. Is he an only child who is concerned about the long term care of his parents? Have a sibling that is handicapped? There may actually be good reasons for a healthy 23 yo to carry that much insurance.

      Reply
      • Right track?

        Not in Whole Life. Cash Value (Whole Life) Life insurance is one of the worst financial products out there. If he needs $1M of insurance, it can be had far cheaper with 20-year level term. He can take the savings and invest that to generate a nice nest egg for him, which he can will to them (in the event of his untimely death).

        if you have a $1M term insurance policy and a savings account, when you die, guess what the beneficiary gets? (answer: $1M -from life insurance, and the contents of the savings account). If you have Cash value, the company keeps the savings piece (upon your death) and pays your beneficiary the face value of the policy.

        Reply

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