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Life Insurance

February 12, 2015

After the Individual Responsibility blog was posted, I received quite a few calls questioning why I don’t recommend whole life, universal or other forms of life insurance.  I will address this, but first I would have liked it better if instead of calling me, the callers made the comments to the blog instead.  This way, not only could I have responded, but my readers could have also.

The previous blog on individual responsibility recommended term life insurance to insure the unlikely premature death of the main family breadwinner.  Its purpose was single-minded, affordable and would serve a valuable function if it were needed.  It would also secure the future cash flow for the people that might be thrust into the role of guardians and have to care for the children.  It might also be advisable to get such insurance on both parents. Further, the need for this insurance would vanish when the children were grown and on their own.

Life insurance is an important part of estate and family wealth planning.  Additional reasons for life insurance would be to create liquidity for survivors where assets are not able to easily be liquidated; to pay or cover a large portion of estate taxes; to leave benefits to someone that will not be inheriting family assets; or to create a tax-sheltered investment fund.  The blog covers a single essential and important need.

One of the arguments made against the term insurance suggestion is that nothing will remain at the end of the period while a substantial fund will be accumulated with the “right” type of policy.  I reject that theory on a few accounts.  1) The young family needs the coverage to provide for their security while growing and the low cost of fixed premium term makes the adequate coverage easily affordable.  2) If a savings and investment vehicle is more advisable, then it should be set up separate and apart from the necessity of providing the proper coverage for the family.  3) On some level, no matter how much insurance is taken out today, in 20 or 30 years it would likely be inadequate given inflation and a permanent policy would end up with depreciated “permanent” coverage.  4) Assuming a policy was taken out today to provide for a fund equivalent to or greater than the total premiums paid over the 20 or 30 year period, the deposits and premiums paid would be in dearer current dollars and would be returned with devalued tomorrow dollars – and would not provide a corresponding benefit to offset what was given up in current and ongoing spending while the payments were being made. At the end of the day, the investment fund would be created with your dollars paid in over the long period of time. 5) Your situation and needs might change and the coverage you applied for today would possibly be inadequate to insure what you might need later on, and a higher premium “permanent” policy – no matter how good it was constructed today – would not cover what you need want to later on.

Another thing I have seen is that many young people buy life insurance based on what they could afford, and it usually is not too much.  If the same amounts were used for a whole life policy, then they likely would have about 80 percent less coverage – not what they need and the family’s potential problem would not be alleviated.

In an ideal world, everybody would get everything they want and need… not really so for most people.  If you have young children, get the full coverage you need for the full period you need it at the lowest cost you can afford.  And to me, that looks like fixed period bare bones term life insurance.

One final note about life insurance:  There are many creative agents that can come up with a type of policy that can fit almost every situation.  If you can afford more than the minimum amounts suggested in these two blogs, I recommend you meet with an agent and find out what can be done for you tailored to your circumstances, needs and goals.

If you have comments, please post them

3 Comments leave one →
  1. 6hawthorne permalink
    February 12, 2015 1:20 pm

    HI ED GOOD BLOG BOB

  2. February 12, 2015 11:27 pm

    Good follow up to the last post. There are places for cash value life products but for the young family or the family with limited means, the value of term cannot be beat. My Dad (an independent insurance agent) bought term and invested the difference. When he died at age 73, he left a couple of highly depreciated whole life policies and a pot of invested assets that will carry my mother to age 100.

  3. Sherry permalink
    February 13, 2015 3:01 pm

    I believe you are spot on. I’ve never been an advocate for whole or universal life insurance because of the factors you mentioned. If a family wants to invest in the future I believe there are many more options than a high priced policy!

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