3 Reasons You Absolutely Should Not Buy Life Insurance in 2023

Stick to simple policies.

To care for a loved one. That's far and away the number one reason to purchase life insurance. Premature death is more than painful -- it's expensive for those left behind. Life insurance provides funds for loved ones after the policyholder passes away. 

But life insurance can be confusing, what with all the bells and whistles and policy add-ons. Despite what you might've heard, it's not right for everyone. A policy has limits. There are better alternatives for folks who want to save for retirement or to fund a child's education.

Term vs. whole life

There are two types of life insurance: term life and whole life. Most folks will be satisfied with a simple, affordable term life policy that expires after a set period.

Whole life policies offer additional features. They accumulate cash value that can be used to catch up on missed premium payments, or drawn upon as an emergency fund, among other things. They're big and sprawling, and they can last a lifetime.

Regardless of which policy you want, there are three reasons you should absolutely not buy life insurance this year.

1. To replace stock investments

Stocks offer better returns than whole life insurance policies on average. The average annual rate of return on a whole life policy is around 1.5%. Investing in the stock market has historically delivered a 10% average yearly return, over five times the return of a pricey life insurance policy.

An insurance policy is not an adequate replacement for investing in the stock market. The best stock brokers offer low fees. Great IRA accounts offer tax-advantages to retirees. Even a safe high-yield savings account offers better returns than your typical whole life insurance policy. 

2. To fund a child's education

If you're thinking of purchasing an expensive whole life insurance policy so you can borrow against it to fund your kid's education, think again. Money you borrow accrues interest. Generally speaking, better alternatives exist.

Consider opening a tax-advantaged 529 plan instead. Or invest the money in a flexible high-yield savings account. Chances are, you'll earn better returns on your investment.

3. If you have little to gain from a life insurance policy

Some folks are in the envious position of having little to gain from purchasing a life insurance policy. Consider whether the following hold true:

• Your family can easily afford funeral costs
• You have sizable assets
• You have no debt or dependents or financial obligations (like co-signed loans)

If so, chances are you have little to gain from purchasing a life insurance policy. And if you'd like to purchase one for peace of mind, consider a simple, affordable term life policy that expires when your dependent is no longer reliant on your income.

Life insurance has one job

According to finance guru Dave Ramsey, life insurance has one job: to replace lost income. Dependents rely on caretakers to pay for food and housing. For most caretakers, that means purchasing a term life policy from one of the best cheap life insurance companies out there. 

When in doubt, ask yourself whether you are purchasing life insurance to replace lost income. If not, chances are there are better places to put your money, including the stock market, a savings account, or a tax-advantaged 529 plan.