#1: Who Absolutely Does Not Need Life Insurance?
The primary reason someone may need life insurance is to provide financially for dependents in the event of his or her death. While this may seem somewhat obvious, it is important to use this idea as a primary filter when considering the purchase of a life insurance policy for people in different financial situations or stages of their lives.
Consider those life insurance commercials for an infant or child. These advertisements certainly play to our emotions. We love our children and it seems like this is somehow a caring thing to do, but what if we apply the filter described above? While it is difficult to think about, we should consider if the death of a child would pose any significant financial strain or economic loss. If the answer is “no”, and it usually is, then perhaps buying a policy for a child is not a prudent move. If you are enticed by a promised financial return in the form a “cash value” that builds during the policy life, you should realize it is most likely a very low return and there are almost surely many superior ways to invest money for that purpose.
The same reasoning applies to other situations. If a person does not have any dependents or does not significantly contribute to someone’s financial well-being, then it may be the right choice to skip the life insurance.
#2: Just How Do They Price Life Insurance Anyway?
There are two factors you need to consider when answering this question. The first is more obvious to most people: insurance companies want to make a profit when selling life insurance. The second factor is more technical: what is a price the insurer should charge to break even in the long run?
This second factor involves what are typically called “actuarial” assumptions and considers ideas about probability of death at each age and the “time value of money”, which is a fancy term for the idea that $100 today is worth more than $100 delivered to you in 5 years.
If the insurer is pricing a policy for someone who is old or in poor health then their actuarial assumptions will reflect that the chance of death in the next 1, 5, or 20 years is greater than for someone who is younger and healthier. We can’t control our age of course, but if at all possible, it makes sense to talk to doctors when they are choosing medical diagnosis codes. Some codes will almost certainly lead insurers to charge more when pricing a policy.
In summary, the insurer will make assumptions about when and how likely it is for the insured to die (the actuarial assumptions) and also build in a profit on top of what would be a truly break-even price (one with an expectation that on the average they would not make or lose any money).
#3: Should You Buy Term or Whole Life Insurance?
The unavoidable truth in this matter is that whole life insurance costs a lot of money. Whole life insurance, as the name suggests, covers you for your entire life so there is no need to purchase a new policy at any time, unless you want to add to the face amount (i.e., the amount the policy pays in the event of death.)
Term life insurance policies insure against death for a specific length of time, e.g., 20 years. It is more affordable than whole life and as you near the end of the coverage period you generally would consider the next purchase to cover you after that first term is over.
Whole life is often marketed as having the added benefit of being an investment vehicle because your policy will grow cash value over the years. It is typically the case, however, that one can do better saving the extra spend in premium and simply buying term life. The savings in premium could be invested on your own or with the help of a financial adviser. Many money managers offer this advice. — (See Wealthfront)
#4: Are Annuities a Smart Product and Should I Buy One?
A life annuity is a financial product that makes regular payments to you for as long as you live. While life insurance is intended to help mitigate financial stress relating to the insured’s death, a life annuity helps manage the financial risk during your lifetime. Those of us who are lucky enough to have a pension plan through our employer may have the option to choose a life annuity as a form of payment when we commence receiving our retirement benefits under the plan. This is a very good choice for those looking for steady and guaranteed income during retirement for your entire lifetime (and who isn’t?!).
The situation of buying one is very different. You would need to spend a lot of money today, in one big payment, to buy a life annuity. They are generally expensive but if you have the means, it may make sense to purchase a life annuity at or near your retirement so that it pays monthly benefit amounts that cover some minimum threshold need for you. For example, if you had retirement funds in the form of your own investment portfolio and a 401(k) and still had some money available for an annuity, it might be a good choice. — (See Kiplinger)
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