19

I'm trying to understand the product and I only have the examples of one family member to go by. What you get from internet browsing is predominantly marketing copy from large companies, if exclusively that.

Why do people purchase Life Insurance? Why is it the most effective product for that purpose?

Thank you.

  • 16
    Since every financial decision I make is wrong, buying life insurance means I won't die (until the term is up of course) ;) – brian Mar 16 '18 at 23:22
  • 2
    Indeed, many companies advertise it to young people (obviously, it's easy income for them, and they don't have to pay anything for several decades), so they advertise it as a form of "investment", usually coupled together with a form of real investment (but you would still be at a loss, as only a small portion of your payments go to the investment, the rest are lost) – vsz Mar 17 '18 at 12:46
  • 3
    You need to use a better internet search engine if you didn't hit upon the Wikipedia entry on the topic in the course of your "internet browsing". en.wikipedia.org/wiki/Life_insurance – Masked Man Mar 18 '18 at 7:32
38

If you have dependents that rely on you financially, you buy life insurance so as to not disrupt their life if you were to die. You have a spouse who would have to pay the mortgage and probably couldn't on a single or no remaining income. You have kids who need to eat and go to school.

It's the most effective product for that because you can rollup the net present value of many years of future income for just a couple basis points a year. Speaking to term life insurance.

Separately there are different estate planning issues if you're later in life, but generally the purpose of life insurance is not leaving your dependents in financial ruin if you pass.

  • I have life insurance on my spouse through my work. She doesn't work. If she dies, will I not receive anything from the policy? – horse hair Mar 16 '18 at 20:38
  • 1
    @horsehair If your spouse were to die, the beneficiary (you) would receive the payment from the policy. Having people who rely on your job is a good reason to have a policy, but it's not a requirement. – MackM Mar 16 '18 at 20:59
  • 1
    @horsehair Voluntary Spouse Life Insurance is a pretty commonly available employee benefit, if you have this spouse coverage then if your spouse were to pass the policy would pay whoever the named beneficiary of that coverage is. Typically with employer life insurance your employer will track beneficiary elections not the carrier. – quid Mar 16 '18 at 21:26
  • 1
    "a spouse who would have to pay the mortgage and probably couldn't" is why I bought mine, and it's the exact value of my mortage. If I pass away, it'll be paid off by the policy (incidentally, we have the same policy for my husband. If he were to pass away, it'd get paid off too). – stanri Mar 17 '18 at 16:22
21

There is only ONE legitimate reason to purchase life insurance - to protect your family from the loss of your income should you die unexpectedly. No other considerations should factor in.

The most effective product for that purpose is simple Term Life.

  • 7
    There are other reasons, though they're rare. Say you want to leave your mistress (or friends &c) a bunch of money, but are afraid that greedy relatives will contest your will and grab the money, as happened with e.g. Hugette Clark. – jamesqf Mar 16 '18 at 19:54
  • 1
    The life insurance will be less upsetting to the greedy relatives because the life insurance doesn't take money away from their inheritance. – gnasher729 Mar 16 '18 at 22:56
  • 4
    Huge oversimplification. Tax benefits can be significant depending on your situation. In many countries including the US and UK, death benefits are paid out tax free, as well as any cash value appreciation is untaxed. – user71659 Mar 16 '18 at 23:50
  • 5
    For anyone whose budget for financial advice is $0, this advice is essentially correct. Some very wealthy people can gain due to life insurance avoiding estate taxes and such in certain limited circumstances, but none of those folks should be taking advice from us here (without paying for it!). – Joe Mar 17 '18 at 1:15
  • 2
    Not just the loss of your income. If only one of a couple with children works, while the other stays at home looking after the children, it makes sense to insure the life of the homemaker too. If they die, childcare will need to be paid for, and possibly cleaners etc. I would say "the loss of the fruits of your labour". – Martin Bonner Mar 18 '18 at 16:47
5

Dying is expensive. Really. Not just because you lose the source of income this person was providing. But you have to pay for the funeral, burial, estate taxes, therapy, mourning period without working.

We normally insure things that are rare, but devastating if they happen.

As a parent, if you die, you'll be sending your kid with a lump sum under his arm to be adopted, maybe by a relative. That eases the tension on them.

If you have a life insurance as a partner in your business, you'll making sure that if one partner dies, the other will be able to buy the business.

Life insurance for your kids is meaningful, because some companies allow the kid to withdraw what was paid into it when the kid is in his twenties.

  • 1
    Dying is anything but rare, though. It might be crude to say, but when you hit 65 you really should have set aside the money to pay for your funeral. – MSalters Mar 18 '18 at 20:53
  • @MSalters: yes, obviously your chances of dying are 100% (given enough time). But your chances of not dying prematurely (compared to the age you are supposed to die in an actuarial table) are quite good. – Quora Feans Mar 26 '18 at 12:29
  • If you die later than 65, you might get a few percent interest annually on the money you've saved for your funeral. After inflation, that can probably be ignored. – MSalters Mar 26 '18 at 12:37
2

There are certain things that money can't buy. Love and affection are among those. But there are monetary investments that get you closer to non-quantifiable objectives. I believe a life insurance is one of those.

Life insurance according to me is targeted at a deep psychological need. Mental peace results from the feeling that you have secured (to some extent) the future of your loved and dependent ones. Life insurance products try to address this deep motivation.

Having said the above points, marketing messages merely help one choose between several options. You cannot force a buyer to invest in a life insurance. Rather, when someone is already sold on the idea of a life insurance, the commercials try to attack the rational mind. Some common benefits stated are tax benefits, bundling of other benefits like fixed income, medical cover, etc.

Last but not the least, some invest in insurance just for tax purposes. But ideally, that should not be the true objective. There will be better ways.

-4

This is likely to get heavily downvoted, but here goes:

If you are not financially disciplined enough to actually save money at this point in your life, buying a whole life policy forces you to do just that. Yes, it is an "investment" that you have absolutely no real control over. Yes, it is more expensive than many alternative means to accomplish the task of saving money. By the time you learn a bit you likely have already paid yourself through the highest cost years of that policy, from an investment standpoint.

However, once you pay through the high cost years with no return the compound interest can far exceed what you would have otherwise been able to save and invest as an ignorant investor, not to mention the fact that insurance companies are definitely very careful of spending money. They may not pick the absolute hottest stocks but they are much less likely than an ignorant investor to lose money.

By saying this I'm not putting someone outside of the financial marketplace down. I wholeheartedly admit that I am an ignorant investor. I have neither the time nor the interest in keeping absolutely current on the financial marketplace. I would rather put money somewhere and let it do its thing than actively manage a portfolio. I am gaining much more than I am paying in the cash value of my whole life policy at this moment, and it is money I can tap into as needed without tax penalties.

  • 3
    You're right, you will be voted down, since if you need external discipline to save, then you sign up for a 401(k) or some other form of payroll deduction scheme. – RonJohn Mar 17 '18 at 6:23
  • 2
    I think you need to explain a bit here, because I can't understand how you can "tap into" your life insurance while you're still alive. – pipe Mar 17 '18 at 7:51
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    @raldy surely that's not a life insurance policy, then? There are other options that you can save that pay out while you're alive, like at retirement. A life insurance policy isn't for that at all. – stanri Mar 17 '18 at 16:26
  • 2
    @stanri, there absolutely are 'return of premium' and 'partial return of premium'' term Life policies. And whole life policies have a running cash value that can absolutely be surrendered or borrowed against with out annuitizing for retirement and whole you're alive. – quid Mar 17 '18 at 20:57
  • 1
    @RonJohn Payroll deduction has limits. 401k contributions have limits. Whole life policies with the ability to access the "cash value" have no limits aside from your ability to pay the premiums, and so long as you take out less than you have put in over the course of the policy, or take out a "loan" for excess amounts, again there are no tax implications. Did you have the financial discipline as a 20 year-old to maximize your savings? If you did, great. You are well above average. For the rest of us, there are some benefits that you have completely dismissed. – RudyB Mar 18 '18 at 2:21

protected by Chris W. Rea Apr 10 at 11:12

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