Can My Savings Take the Place of Life Insurance?

The quick answer? It really depends.

If life insurance were free, there's a good chance more people would have it. But life insurance does cost money, and it's an expense some people might choose not to bear.

Now to be clear, life insurance doesn't necessarily cost a lot of money. If you buy a term life insurance policy, you might pay considerably less than you will for a whole life policy. And your premiums under a term life policy might be pretty affordable.

Either way, it's important to put life insurance in place so your loved ones are protected financially in the event of your passing. But what if you have a decent chunk of money in your savings account? Could that take the place of life insurance, or must you have a separate policy?

How much savings do you have?

The great thing about life insurance is that you might manage to secure a pretty decent-sized death benefit (the sum of money your beneficiaries receive upon your passing) at a relatively low cost. You might, for example, be able to provide your loved ones with a $500,000 death benefit at a cost of just $800 a year in premiums. 

In fact, let's say you get a term life insurance policy for $800 a year and you pay that premium over 30 years. All told, you'll have spent $24,000 to give your loved ones half a million dollars' worth of protection.

But can you get away with skipping life insurance if you have a very large savings account? Well, maybe.

It's generally a good idea to secure life insurance with a death benefit that will cover around 10 times your salary. So let's say you earn $50,000 a year. In that case, a $500,000 death benefit might suffice. And if you have $500,000 sitting in savings, then you might say to yourself that you don't need a life insurance policy because you have enough cash in the bank to replace your salary 10 times over.

But chances are, if you earn $50,000 a year, you don't have $500,000 in the bank. Sure, perhaps you inherited a lot of money you're keeping in savings, or you're a really good saver. But the average person with a $50,000 annual income doesn't have half a million dollars in savings. And so if you earn $50,000 per year but only have, say, $50,000 in savings, it means your bank account can't do for your loved ones what a life insurance policy might.

Explore your coverage options

Some people shy away from life insurance because of the cost. But you may be surprised at how affordable a term life insurance policy is. So before you write one off, shop around and get quotes. 

For just a small fraction of your paycheck, you might be able to put a nice amount of protection in place for the people you care about the most. And if you're able to keep your premiums affordable, you should be able to keep funding your savings so you have protection there, too.