Until a few years ago, it was rare for me to learn that someone I knew had died. When such tragic news did circulate, the cause of death was usually the result of an accident. Not seldom due to the individual taking certain risks as part of their lifestyle choices. Death was mostly accidental and mostly preventable.
Now in my 40s, the news of people in my age group dying has become more frequent. No longer purely accidental, causes of death are increasingly a result of illness or long term disease. Essentially, death by stupidity and bad luck making way for death as the end result of a steady road traveled lined by poor food choices, smoking, a lack of exercise and too much stress. Poor habitual lifestyle choices are the main culprit. Forty plus years of bad habits culminating into the ultimate game over moment.
Most of us don't like to think of the possibility of us dying early. Yet, as we age this possibility naturally becomes more and more probable. In our 20s and 30s we felt invincible. Hence some of us did not make it into the 40s. Reality is, life isn’t endless (at least for now) and shit does happen.
But what happens to your family when you die early? If you have well prepared and build wealth then perhaps nothing to worry about. But what if you haven’t? What if you still have a young family dependent on your income only, no significant amount of savings or other capital. Perhaps, you still have a large mortgage to pay off or other debt and you like to make sure it is taken care of in the event of your unplanned and untimely departure.
One simple option to ensure your family is safeguarded until they figure out what to do next is to buy a life insurance policy.
When you first explore life insurance offerings you find that there are many different product options to consider. Making the appropriate choice for your circumstances can be a difficult task.
There are several different types of life insurance policies available. Each type offers different features and benefits. Here are some common types of life insurance:
At the most basic level, life insurances can be categorized into two types:
- A simple and straightforward insurance. You pay premiums in return for a defined benefit paid out upon your death to assigned beneficiaries.
- An insurance that in addition to the death benefits has a cash value savings component built into the plan that relies on different investment strategies. Some allow for adjustments of premiums over time and some don’t. Investment options vary in risk and flexibility.
Let’s review in more detail:
- Term Life Insurance: Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. If the insured person passes away during the term, the beneficiaries receive a death benefit. This type of policy does not accumulate cash value and is generally more affordable than other types. You pay a monthly or annual premium in return for a defined payout. It’s the most simple strategy, a straightforward insurance policy.
- Whole Life Insurance: Whole life insurance provides coverage for the entire lifetime of the insured person as long as premiums are paid. In addition to the death benefit it also includes a cash value component that grows over time. The premiums for whole life insurance are typically higher than for term life insurance, but the policy builds cash value that can be borrowed against or withdrawn.
- Universal Life Insurance: Universal life insurance is a flexible type of policy that combines a death benefit with a cash value component. It allows policyholders to adjust their premium payments and death benefit amount over time. The cash value can grow based on the policy's interest rate, but it's also subject to market fluctuations. It allows for premium adjustments overtime whereas Whole Life Insurance doesn’t. This also means however that benefits may vary vastly based on adjustments made.
- Variable Life Insurance: Variable life insurance offers both a death benefit and a cash value component. The policyholder has the opportunity to invest the cash value in various investment options, such as stocks or bonds. The cash value and death benefit can fluctuate based on the performance of the investments.
- Indexed Universal Life Insurance: Indexed universal life insurance provides a death benefit and a cash value component that is tied to the performance of a stock market index, such as the S&P 500.
When choosing a life insurance policy, you will need to consider factors such as your age, health, financial goals, and the needs of your dependents.
While on the surface a term life insurance seems the least smart option, since you pay premiums that offer you no other benefits in return unless you die, looking at it from a bigger picture angle may lead to a different conclusion.
Here is why:
When committing to insurance options that offer to build cash value or savings you will have little or no influence on how your money is invested. It is mostly not possible to take out funds and re- allocate into other, potentially more sound investments. If you could earn a steady return of 5-8% on a simple ETF investment for example and maintain flexibility of liquidating that investment and redeploying it when necessary, wouldn’t that make more sense than just having your funds stuck in a life insurance plan?
In an ever changing world, flexibility is key. Spend as little as possible on the insurance to cover your family’s immediate needs should bad luck strike and invest smartly elsewhere maintaining flexibility to move funds around.
That’s what I felt was the most sound action to take. After some research I settled on an established insurance provider with a good reputation, underwritten by one of the big international Insurance companies. While it took some time to get through the application process that included medical exams, I finally was accepted into the program. Unfortunately, the final annual price increased significantly from their initial quotation as a direct result of some values from my extensive blood test being out of the normal range. Insurance providers will certainly jump at any opportunity to increase their premiums claiming increased risk.
Now that I have confirmed my life insurance, I feel relieved knowing that in the event of something unexpected happening, my family will have the means to manage through some hard times. Of course, I have no intention to check out early. I like to be a part of my kids life as long as possible. I want to see them grow up and find their purpose in life.
Therefore, I see this life insurance cost as a plain write off that will simply give me peace of mind. You wouldn't drive your car without car insurance,... or would you?