Wednesday, May 25, 2011

Insurance, on your life.

Question:  Do you know what a woman and insurance have in common?
 Answer:  They are both expensive, difficult to understand, and what you get is not guaranteed.

Lets make a bet. I'll bet you are going to live longer than 82.4 years. If you do, I win. If you don't, you win.

Don't like the odds? Fine. If you die THIS year, I'll pay you $100k. If you don't, you pay me $100. Seems like a good deal, right? If you live, your alive, so you win! If you die, man, you got a great deal, or at least your loved ones did. 

This is life insurance in a nutshell: you are paying for the chance to gamble on when you will die. Like a casino, life insurance companies are there to make money, so their goal is to have the odds as much in their favor as possible, and charge you fees on top of that.  As with any gamble, there are winners and losers, but with a little knowledge on your side you can make sure the house odds are not working against you. 

The basic life insurance products are term and whole life. Term products have a limited life or "term," and you pay based on how old you are now and how much you want to receive if you die. For example, a healthy 20 year old will pay a fairly low premium on a 10 year term policy, as he is not expected to die before 30. If he does, the insurance company loses, and has to pay out big. Think of term as a spin on the roullette wheel: when you are young, you are betting it all on 1 number. As you get a little older, you might be betting on the first 12, and when you are elderly, its picking even or odd, black or red. 

Whole life is different, as once you are in, you better be in for the long haul. Within whole life there are fixed premium plans and variable (called "universal") plans, and countless combinations in between. The game on whole life it often includes an investment component: you pay the insurance company to take on the risk of you dying early, but they also take some of your money and invest it, usually on the promise that this is your "retirement" plan. 

Alright, so what do I do when my friend's cousin's in-law has a "party" where they serve us margaritas and try to convince us that we all need to buy into this life insurance deal? 

Here are the questions to ask, and issues to consider:

Do you need insurance at all?- On your house and car, yes. On your life? maybe. It all depends on who you are worried about taking care of when you are gone. If you have these worries, read on. 

Have you ever heard of this company? -Insurance companies are not banks, and are not federally guaranteed (unless you are AIG, but that's an anomaly). Credit ratings reports are available for almost all insurers, and you should seriously examine these: if the company you have been religiously paying for 10 years goes belly-up, you are out of luck. 

Do you need term, or whole life? - The answer is usually always term, unless you really, really know what you are doing with a whole life policy. This is just like picking a financial advisor, as with many whole life policies, they make all the decisions for you, and you pay a fee for that service with little or no guarantee of return. 

How much risk are you comfortable with? - There are products that spread the risk across the spectrum, from the insurance company to you and back again. There are products that are based on only time passing, and there are products that are based on the stock market. Get the real facts before you sign up, but know that just like any investment, the lower the risk, the lower the returns. 

Are you a high net worth individual, who is worried about "death taxes"? - Then you should have passed away in 2010. If you did not, there are a variety of trusts and planning devices using life insurance to transfer money from your estate to your loved ones without Uncle Sam getting his hands on it. These can be a great tool, but only make sense if you have a lot of money. 

Conclusion: Life insurance can be a great way to provide for your family when and if you happen to pass away, but it is not for everyone. It costs money, now, to provide a benefit later. Make sure you educate yourself on what sort of products are out there, the real cost and benefits, and who it is you are doing business with. There is plenty of cheap health and life insurance that will provide you with all the coverage you will need, as long as you make an informed decision. Always talk to a trust estate planner before making the decision to add life insurance to your portfolio, and of course, best of luck. 

Cartoon used with permission, courtesy of .


  1. I really enjoyed reading this post. The quote at the top was also very entertaining

  2. What if a whole life insurance policy comes with a cheaper monthly premium than a term life insurance policy? Younger and lower income individuals are often sold on whole life policies because of the lower monthly payments. They want the policy but don't want to get sucked dry.

    Can you do a post on IRA's - Roth vs. Traditional - using a similar format?

  3. Should I get rid of my insurance then?

  4. Greg- Not necessarily. It depends on what your goals and planning needs are, as well as what type on insurance product you have purchased. Please email me and let me know the specifics.

  5. Pie- the lower premiums can be deceptive, as you have to continue to pay over the life of the policy, and often they are variable rate plans that can raise as you age. I'll look to do a post on IRA's.

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