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


Eric 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.