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Life Insurance


One aspect of financial health than many people (even those who are otherwise in good shape financially) overlook is providing for an adequate safety net in the event of their death. Life, and death, happen at unexpected times. Even the best investing and money management strategies can become worthless when someone dies before they have saved enough money to provide for their loved ones left behind. Life insurance is designed to replace income that a deceased person would have provided for their family so that the family does not fall into financial distress. Any solid money management strategy must also include some form of life insurance. As with all forms of insurance, there are some caveats you should be educated about before selecting a life insurance policy.

There are two types of life insurance: Whole Life insurance (and variations on whole life) and Term insurance. Whole life is insurance that you maintain for the duration of your life. Term insurance, on the other hand, covers you for a specified period of time; generally between 10 and 30 years duration.

The way all life insurance works (whole life and term, both), is that you enter into an agreement with the life insurance company that your beneficiaries will be paid a fixed amount of money (face or policy amount) when you die. The amount of money it costs you to provide this coverage for your family (the premium you will pay to have the policy) varies according to your age, health, occupation, etc. The younger you are, the better your health, and the safer your occupation, the smaller your premiums will be. The longer you live, the more money you will end up paying in premiums. If you die unexpectedly, however, the insurance company must honor the contract and pay your beneficiaries, even if you have not paid enough in premiums to offset their costs. Conversely, if you live longer than expected, you will have paid enough in premium so that the insurance company will turn a profit.

The vast majority of life policies sold direct to consumers in the United State are Whole Life policies. This does not mean that Whole Life is the best kind of insurance. In addition to being more profitable for the insurance company, Whole Life insurance is also the most profitable type of insurance for agents to sell. Their commission is a percentage of the life insurance premiums. So, clearly they make more money when the premiums continue to be paid until the insured person dies. Term insurance, on the other hand, is significantly less lucrative as the premiums will stop being paid after 30 years or so.  An agent can be very helpful finding you the best and most cost-effective policy of a given type but they may not be the best to advise you as to the type of insurance you need as they have a reason to steer you in one direction over the other.

This explanation makes it clear why insurance companies sell more Whole Life than Term insurance, but why do consumers buy it? Well, it is all in the marketing. Insurance agents convince people that they need insurance forever. They scare people into thinking that they will never be financially independent and that their families will be destitute without life insurance. Term insurance, they assert, will end right when you need it most, around 60 years of age. The fault in this train of logic is that by the age of 60, you should be "self-insured." That is, you should have enough assets (investments, savings, and real estate) to sustain your family in the event of your death.  Probably, by this age, your children are grown and financially indepent.  College costs are behind you and you have saved for your retirement.  Your survivors needs may not be as great as they were when you were younger and had more people depending on you.  Remember that age 60 is around the age you probably planned to retire. You would need to be self-insured by this age anyway in order to be able to stop working for a living.  Obviously, if you had children late in life, you may still have many dependents and face educational costs.  In this case your insurance needs will remain high even late in life.