5 Things To Know About Life Insurance

You May Not Need Life Insurance

As with any other insurance, the purpose of life insurance is to turn an unknown financial risk into a known premium. We are all going to die one day; that is a known fact. What is unknown is whether we are going to die at a time in our life when it would cause a financial hardship for our loved ones. Life insurance doesn’t keep us from dying nor does it comfort our loved ones when we do. Rather, its purpose is to ease the financial strain our death causes those we are responsible for.


In deciding whether to purchase life insurance, or how much insurance to purchase, first honestly determine who would be hurt financially if you died tomorrow. If you are single with no children, the answer may well be “no one”, in which case you do not need life insurance. If you are retired and using your investments for income, you probably don’t need life insurance as your investments will continue to work even if you aren’t still with us.

If you are the parent of young children, you need a lot of life insurance. If you died tomorrow, the hope is that you would have sufficient insurance to replace the income you would have earned to support those children, or to pay for the daycare and other household services you are providing. Few people can afford that much whole life insurance.

Term Insurance Gives You More Bang for the Buck

There are two major types of life insurance, term and whole life. Term insurance is meant to cover you for a “term”, for a certain number of years, whereas whole life is meant to cover you for your entire life.

To price term insurance, the insurance company determines your risk of dying in a particular year or within a certain number of years, and prices the policy accordingly. For example, if their figures show that one person with your characteristics in every 10,000 dies in a year, they will charge you $1 for each $10,000 in coverage, plus enough for administration and profit.

On the other hand, if you buy whole life insurance, the same company has to charge you more. They use the $1 per $10,000 to cover in the risk of you dying this year, and then they need to charge you substantially more so they can put money into the cash value of the policy. Next year, your chances of dying go up, but your premiums don’t, with whole life. Rather, the insurance company puts a little less money in the cash value bucket and a little more into the insurance bucket. Eventually, unless you die prematurely, you have enough cash value to pay the death benefit on the policy.

Whole Life Gives You Your Money Back--and That’s Not Usually a Good Thing

One selling point for whole life (which pays a bigger commission to agents than term) is that you are not throwing your money away. With term, they argue, if you outlive your policy, you have basically thrown money away, whereas with whole life, you can be sure the cash value will always be there, either for you to borrow against or for your loved ones when you die.

There are two problem with this idea:

• It is almost impossible for people who really need life insurance to afford enough whole life to meet their needs. With term you are not pre-funding a pot of money for your old age, you are paying for a service, for the insurance company to bear the financial risk of you dying young. You aren’t wasting your money any more than you are when paying someone to cut your grass, which will continue to grow.

• Even if you have enough money to buy enough whole life, you could be investing it elsewhere, and “elsewhere” will usually give you a better return and more flexibility. 

Buy term insurance to meet your life insurance needs and buy a diversified portfolio of low-cost mutual funds or ETFs to invest for the future.

You May Be Able to Save Money

Many people consider life insurance to be a “one and done” solution. They figure out how much insurance they need, shop around for a good policy, buy it, and then renew it yearly until they don’t need it anymore.

If your health is better than average for your age, you may find that a new policy can give you more coverage for the same price, or save you money on equivalent coverage. Unless your health is on the poor side, it doesn’t hurt to shop for new life insurance periodically; just don’t let the old coverage lapse until your new coverage is completely in place as some policies have limited payouts during the first few months.

The right life insurance at the right times in your life is an important part of any family’s financial plan.