The Basics of Life Insurance

Ahhh insurance... the thing we all love to hate.  Since the topic of insurance is too massive to cover in one week, right now I'm only going to talk about life insurance.  For some reason life insurance is one of those things that people love to procrastinate getting.  This is especially true if you are in your twenties or even thirties.  This is just irresponsible, to say the least.  You might think, "but if I get life insurance, I'm going to die."  Well guess what, we are all going to die someday.  When (not if) you die, do you really want to leave your loved ones in a pinch?  I shouldn't have to brow-beat you too much because I'm sure you all agree that this is something that the vast majority of people need.  As a disclaimer, I am not an insurance expert and don't pretend to know all the nitty-gritty of writing policies.  This advice is for educational and informational purposes only.  Please see your trusted insurance provider for personal quotes and service.  If you live in Utah and are in need of reliable, honest insurance help, I know some highly qualified agents who could help you.   


Insurance, simply put, is transferring risk from you to the insurance company.  Whether it's home, auto, life, health, disability, identity theft, liability, or long-term care; they all do the same basic thing- transfer risk.  Because of this, insurance is not meant to be an investment vehicle- avoid these types at all costs.  The fees are typically very high and the returns usually mediocre at best.  So keep in mind, there are many types of life insurance, some good and some not so good.


Let's talk about the many types of life insurance available.  It can be quite confusing if you don't know the terminology.  There are two basic types of life insurance, temporary or term level and permanent or whole/universal level.  Whole, universal or cash value policies are all pretty much in the same boat of permanent insurance (yes, they do have differences), but as a whole they are very expensive, and horrible investment products.  The only people who think these are a great idea financially, are those who sell them.  Typically the first few years of premiums that you pay go straight to the agent as commission making them highly profitable for agents, so beware.  These policies are typically sold as a way to save and invest in your future, because over time they build cash value (after the first few years that is).  Here's where the big problem comes in, when you die, the money that you 'saved' in your insurance policy goes away.  The insurance company pays the face value of the policy and your built up cash value is null and void, yes, they keep it!  It does not get passed on to your heirs.  For these reasons steer clear of them.  I've never heard any financial expert or guru independent from the insurance industry endorse this type of insurance. There are very few instances that I would even consider keeping or getting such a policy.  My exceptions are if you can't qualify for any other type of life insurance because of a major health event in your past or if you are in a profession that is considered too high risk to be insurable.  Again check with your trusted insurance agent for specifics about what you qualify for.


On the other hand, term insurance is the way to go.   Here are some of the benefits.  First, you can choose how many years you want or need coverage for, anywhere from 10-30 years.  Second, the premiums are dirt cheap (especially compared to whole life policies).  A 20-30 year policy with 8-10 times your income is usually adequate in replacing you, financially speaking.  In general, whole life policies are so expensive that you can't afford to buy the full 8-10 times your income so not only do you end up with a crumby product, but you're under-insured at the same time.  Lastly, I recommend getting coverage outside of your work.  It's usually cheaper and if you leave or lose your job for any reason you still are covered.  


That said, let's talk about who needs it and how much you need.  If you are single with no one depending on your income (ie children, parents, siblings), you are in the small group of people who don't need to carry substantial amounts of life insurance.  Chances are your work even pays for a minimal $10-50k policy for you.  This would be enough to cover any medical and burial expenses you leave behind.  If however you have children, a spouse, or anyone else who depends on your income to survive, YOU NEED LIFE INSURANCE.  Your death would be hard enough to deal with emotionally for your loved ones, why would you leave them in dire financial straits as well?  A word of warning, don't think that you stay-at-home moms or dads won't need life insurance simply because you don't bring a paycheck home.  Think about all the costs of childcare, cooking, and cleaning.  They cost a considerable amount to hire out.  Even though I'm a stay-at-home mom, I still have a $250k policy that would help my husband with our children in the event of my death.  Also, as a side note (and this should really be a no-brainer) don't buy life insurance for kids.  It's not a good way to save for college.  Just get a child rider for your term policy.  This will cover any expenses in the event that heaven forbid something did happen.


One last thing just to drive the point and importance of life insurance home.  I heard a story of a young man in his late 20's, who had been married for a few years.  He and his wife were expecting their first child.  Sadly, he was diagnosed with a brain tumor and passed away mere days before that child was born.  In his final days, he was at peace because he knew his wife and baby would be taken care of, all because he had taken the time to get a term life insurance policy in place a few years earlier.  Please, you never know when you will die, so be prepared for when it happens.