When life insurance isn’t worth it


The principle behind life insurance is simple, in theory. It’s also kinky, at least compared to other financial services. He pays small amounts at monthly intervals, so that when he dies, a beneficiary of his choice receives a sum of money that is close to what he would have earned had he remained alive.

That’s the stark truth, which many life insurance clients don’t understand: the service is supposed to be nothing more than a replacement plan. The idea is that if your family suffers a crisis that transcends finances, at least your finances will not be affected too negatively. If you die, your spouse and children won’t have to take on multiple jobs, beg, or lose your home and car.

Hedging your bets

Key takeaways

  • Life insurance products offer a way to provide financial funds to beneficiaries after the death of the plan owner.
  • Basic life insurance policies are designed to provide replacement funds that can roughly equal what the policyholder earned or a percentage of the policy.
  • A life insurance policy for someone with no income or no dependent beneficiaries can be a waste of money.
  • Term life, whole life, and universal life insurance policies can be options with a few very different provisions.

It is important to remember that life insurance is not really “insurance” in the dictionary sense. When you buy life insurance, you are not “insuring” anything. No matter how much money you give them, Ameriprise cannot prevent you from dying. No, life insurance is more about hedging your bets than anything else. While you prefer to live, if the destination has an alternative plan, you can spend money now to help your family avoid multiple catastrophes later.

But as a result of it being called insurance, there is an overly conservative type of person who believes that if “coverage” of some kind is good, then more coverage must be better. Buying life insurance thus becomes a test of one’s ability as a responsible adult and breadwinner. What kind of person doesn’t want to protect their loved ones? To that end, some people insure everything that moves, including their children.

Sounds great at first, until you remember that kids don’t make money. Or at least no money that is difficult to replace. What reinforces the morbidity of life insurance: losing a child is such a colossal tragedy that if there is any eventuality for which you have to be prepared, that is it. Some parents argue that they cannot function after the death of a child and therefore a policy on such a child helps them sleep at night. But if you claim that it won’t be able to work anyway, why not keep money that you would have otherwise spent on life insurance for someone with barely any income?

The same goes for older relatives. Both the healthy and the sick have less and less time left, and the less healthy an older relative is, the lower the death benefit they will receive for a similar premium policy. Add in the limited income of retirees (regardless of how substantial your net worth is), and most of the time, senior insurance seems like a reckless move.

How much will you get

Stay alive and a standard term life insurance plan is not profitable. Start a 20-year term policy today, and if you don’t die by 2040, you won’t have received anything. That is not a life insurance design flaw, but rather a feature. After all, for the life of the policy, you’ll get the peace of mind that comes with knowing that your death will not impoverish your family. Most policyholders understand this and appreciate that life insurance is not intended to be an “investment” in the conventional sense.

Other insurance clients are uncomfortable with the idea of ​​sending a long series of fixed payments to a financial services company with the possibility that they will never see any potential payout for it. Instead of accepting life insurance for what is, again, a replacement plan, these customers want some kind of refund. Therefore, the industry designed whole life insurance and universal life insurance, two variants of term life insurance, each of which offers a cash value beyond the death benefit of standard life insurance. You pay a little more each month than you would with a term policy and the difference accumulates and can be redeemed at your convenience.

Buying more complex policies than a term life insurance policy might they make economic sense if the cash value increases fast enough. But investing and insuring are two different and generally incongruous goals. There are safer and more direct ways to invest, beyond enhancing the insurance policy with an annuity form. A protection plan / investment plan combination is like a toothbrush and nail file combination, assuming there is such a thing. The hybrid is probably not going to perform any of the tasks as well as the disparate products it claims to replace.

The bottom line

In principle, this is not a curse against life insurance. If you have enough income, a risky enough chance of staying alive (which a prudent insurer will take note of and charge a correspondingly higher premium), and enough dependents with little purchasing power between them, a term policy isn’t necessarily a bad one. way to spend your money. Just remember that Investing is deferring spending in the hope of financial gain. Ensure is spending now with hopes of avoiding financial losses. In that sense, the two activities are almost opposite. An insurance policy masquerading as an investment will rarely be your best option to achieve the conflicting goals of maximizing return and minimizing risk.

www.investopedia.com

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Mark Holland

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