A Lousy Investment
Life insurance is one of those things that most of us need but none of us enjoy talking about. When it does come up in conversations, it’s mostly because someone is complaining about being sold something that is both expensive and complex.
I think the problem is confusion about the purpose of life insurance. So let’s clear that up right now. For most of us life insurance has one purpose — to replace an economic loss.
It’s not for education savings. It’s not for retirement savings, or to provide a tax-free loan later in life. No matter how much you buy (or are sold) it will never replace an emotional loss.
Once we are clear about the purpose, buying the right kind of life insurance becomes much easier. Most of us don’t need a variable life insurance policy that also acts like an investment. We have investments for that.
No, what most of us need is a simple term insurance policy, one that will protect us against what could otherwise be a financial disaster.
So, to buy term life insurance you “simply” need to calculate what the economic loss would be if you lost a loved one and then buy the best insurance you can to replace that loss. If there is no economic loss, or you can afford to absorb that loss yourself, there is no need for life insurance.
You can start by asking or finding the answers to two questions:
1. What amount of insurance would I need to replace the economic loss?
2. How long do I need that protection?
Keep in mind that the amount of insurance you need may change over time. For most people, it seems to decline over time, as obligations to family change and the value of your investments hopefully grow. At some point, it is a reasonable goal to be at the point where you are secure enough financially that you no longer need life insurance.
So why the wink with the word “simply” up above? Because these aren’t always easy questions to answer. But they are the best place to start.
Now, just so we’re clear, there are valid reasons to use permanent insurance. In some estate planning, asset protection, or charitable planning situations it is the only tool for the job. But these situations are certainly the exception and not the rule. For the vast majority of us a simple term policy will do.
This sketch and post originally appeared in the New York Times on April 12, 2010.