Most adults need life insurance. If you have dependent children, a spouse or anyone else who would suffer financially if you die – or if estate taxes could erode the size of the estate you want to pass on to your family or charity – then almost certainly you should own life insurance. Yet many people don’t own any, or they don’t own enough.
Who’s not buying
Sitting down at the kitchen table
with an insurance agent once was a financial rite of passage. Today, people
prefer to sit down with their stockbroker. Fewer than half of all American
households have any life insurance beyond the usually inadequate amount
provided by employers, according to A.M. Best & Co., an insurance rating
company. Americans bought one-third fewer life insurance policies last
year than they did 15 years ago.
There are numerous reasons life insurance
is being ignored. People have grown more concerned about funding their
retirement, so they’re putting money into tax-favored retirement accounts
instead of into life insurance premiums. Life insurance companies emphasize
the investment qualities of their policies instead of the death benefits
at a time when more and more people consider it a poor investment alternative.
Class-action lawsuits against insurance carriers claiming product misrepresentation
have also contributed to the backlash. Two-income families feel they can
better weather the death of a spouse than a single-wage-earner family.
Nonetheless, owning adequate life insurance should remain an important
part of your financial picture.
The principal reason to own life
insurance is the protection provided by the death benefits. Life insurance
can replace the lost income of the deceased and pay for future financial
needs such as college education for the children.
Investments in the stock
market are not a substitute for life insurance. Many Certified Financial
Planner professionals recommend making sure adequate life insurance is
in place before starting an investment program-even if it means paying
the premiums with money that otherwise would have been invested.
Insurance vs investment
Why spend money on premiums when
you could use it to earn money in the stock market? For one thing, investments
don’t guarantee a return. Yes, a well-conceived investment plan will probably
earn at least a reasonable rate of return-perhaps an excellent one-over
the long term. The problem is that death doesn’t always wait long term.
As a group, people live well into their seventies, but individuals die
at all ages.
Let’s say you ignore buying additional
life insurance and divert the premium money into the stock market because
you feel the market is a better investment than life insurance. If you
live to a ripe old age and your investments do well, that may prove to
be a smart choice. The problem is, what if you die prematurely, before
you’ve had time to invest enough in the market? Your family can’t live
off the investments you never made. But they could live off life insurance
proceeds. And those guaranteed death benefits become available the day
you buy the policy. You don’t have to wait for the market to rise or for
the long-term benefits to occur.
The other risk you run with investments
as a substitute for life insurance is that even if you’ve built up a sizable
portfolio, its value might be down at the time your survivors need the
money. Worse, your survivors will almost certainly pay income taxes on
the profits from the sale of investments. Death benefits would have passed
to them income-tax free, and with proper planning, estate-tax free.
This issue of investments versus
life insurance remains true regardless of whether you buy a term policy
(fixed death benefits for a fixed period of time) or a cash value policy
(death benefits plus an investment component). Term insurance may be the
best buy for the majority of families. However, even if some form of investment-type
life insurance is right for you, such as for estate planning purposes,
the first priority of the policy should still be the death benefits. Insurance
should never be bought solely as an investment asset.
Life insurance serves more than one purpose: it may be used to cover your family’s financial needs at the time of death (hospital bills, burial costs, estate taxes), during an adjustment period (new job, new home) and then for ongoing expenses (regular bills and expenses, the cost of day-care costs or tuition, retirement). It’s important not to overlook the death benefit value of life insurance.
There is no one-size-fits-all plan. How much and what type of insurance you need are details to be discussed with a trusted financial planner or life insurance advisor.