When Life Insurance Isn’t Worth It

Life Insurance

You pay small amounts at monthly intervals, so that when you die, your chosen beneficiary receives a sum of money approximately equal to what you would have earned if you had survived.

It’s the plain truth, which many life insurance customers don’t understand: the service is meant to be nothing more than a replacement plan . The idea is that if your family were to suffer a crisis that transcends finances, at least their finances wouldn’t be affected too much. If you die, your spouse and children won’t have to take on multiple jobs, beg for alms, or lose the house and car.

Life insurance products provide a way to provide financial funds to beneficiaries after the death of a plan owner.

Basic life insurance policies are designed to provide replacement funds that may be approximately what the policy owner was earning or a percentage of what they were earning.

A life insurance policy on someone with no income or dependent beneficiaries can be a waste of money.

It is important to remember that life insurance is not really “insurance” in the dictionary sense. When you buy life insurance, you don’t “insure” anything. No matter how much money you give them, Ameriprise can’t stop you from dying. Although you prefer to live, if fate has another plan, you can spend money now to help your family avoid multiple disasters later.

But because it’s called insurance, there’s an overly conservative type of person who believes that if any “coverage” is good, then more coverage must be better. Purchasing life insurance therefore becomes a test of a person’s ability to be a responsible adult and breadwinner. For this, some people insure everything that moves, even their children.

Sounds great in principle, until you remember that kids don’t make money. Or at least no money that would be hard to replace. Some parents claim that they could no longer function after the death of a child, and therefore a policy on said child helps them sleep at night. But if you say you won’t be able to function anyway, why not save the money you’d otherwise spend on life insurance for someone barely earning an income?

The same goes for elderly parents. The time remaining is getting shorter for both healthy and infirm people, and the less healthy an elderly relative is, the more death benefit you will receive for a policy of a similar premium amount will be. weak. Combined with the limited incomes of retirees (regardless of their wealth), most of the time, insurance for the elderly seems like an ill-advised decision.

how much you will receive

Stay alive, and a standard term life insurance plan has zero returns. Start 20-year term insurance today, and if you don’t die by 2040, you won’t receive anything. This is not a design flaw in life insurance, but a feature. After all, for the duration of the policy, you will have peace of mind knowing that your death will not impoverish your family. Most policyholders understand this and know that life insurance is not an “investment” in the traditional sense of the term.

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Other insurance customers are uncomfortable sending a long series of fixed payments to a financial services company with the possibility that they will never see any potential payment for it. Rather than accepting life insurance for what it is – again, a replacement plan – these clients want some sort of return. That’s why the industry has come up with whole life insurance and universal life insurance, two variants of term life insurance that each offer a cash value greater than the death benefit of standard life insurance. You pay a little more each month than you would with term insurance, and the difference accumulates and can be redeemed at your convenience.

Purchasing policies more complex than term life insurance could be economically attractive if the cash value increases fast enough. But investing and insuring are two different and generally incongruous goals. There are safer and more direct ways to invest, beyond enhancing your insurance policy with some form of annuity. A protection plan/investment plan combination is like a toothbrush/nail combination, assuming such a thing exists. The hybrid probably won’t perform either of these tasks, nor the disparate products it aims to replace.

This is not a whining about life insurance in principle. If you have sufficient income, a high enough probability of survival (which a prudent insurer will take into account and charge a higher corresponding premium) and enough dependents with low earning capacity, term insurance is not necessarily a bad way to spend your money. Remember that investing means postponing spending in the hope of financial gain. To insure is to spend now in the hope of avoiding a financial loss. In this regard, the two activities are almost opposites. An insurance policy masquerading as an investment will rarely be your best bet for achieving the conflicting goals of maximizing return while minimizing risk.

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