Headline: Is Life Insurance Boring You to Death?

Date: 2/27/2021

Body:   I was just viewing the course Getting Your Legal  House in Order, and it mentioned Life Insurance.   Life insurance can be really important in many families, but the subject is not…. Well, people don’t cram the auditoriums for the seminars.  But, I would like to argue to the contrary, that Life Insurance can be Life-affirming and ZZZZZZZZZZZ.     See?  Now you know why only 54% of adult Americans have Life Insurance today.  To really approach this topic, a whole semester would be required.   I will try to approach it in 4 pages.   Wish me luck.

What is Life Insurance and Who REALLY needs it?

Life insurance is a legally binding contractual arrangement between the insurer and the insured.   At the beginning, it is important to see this insurance as a risk-mitigation technique: For this reason, life insurance will normally be much less expensive when you’re young (and the risk of death is lower) and the premiums will increase as you begin a policy later on in life.   This is because of the increasing risk of a large payout that th Life insurance has a couple of purposes.  Chief among them is to replace income for family members left behind.   It is likely that the departed family member had some significant role in financially supporting the family.   Life insurance provides a financial cushion that allows space for the family to adjust financially to a new reality.  It also pays for unpaid expenses for the deceased family member and can create an inheritance for the heirs.   Related, life insurance proceeds can be used to pay inheritance and other estate-related taxes. (This can be significant!!)

In addition to families with young children, life insurance can come in very handy in other situations as well.   If there is a member of the family who has special needs and will require expensive treatment over the long-term, Life Insurance can ensure the future possibilities for this family member.  Additionally, businesses can sometimes benefit significantly if they take out insurance policies on key employees.

The death benefit associated with a Life Insurance Policy is usually tax free.   Some wealthy individuals will have this tax-advantaged policy within a Trust arrangement, and use tis money to pay estate taxes.  Some people try to use Life Insurance as an investing tool, but, I think that there are probably better ways to go about this

Pros and Cons of Life Insurance

Like any part of life, there are Pros and Cons of purchasing Life Insurance:


Financial peace of mind for your family.

Flexibility to use the funds from life.

Fixed premiums so that you know how to budget

Permanent life insurance offers the possibility of building savings through investments


For term life insurance policies, when the term is over and the death benefit is not paid, any premiums paid into the policy are forfeited back to the insurance company.

For whole life with cash values or universal life, investment options do not usually yield the highest possible returns.  If one were to invest wisely, you could likely do better.

If you do not pay the premium, your policy will be canceled and you may have to take out a new life insurance policy, subject to your current (read “older”) age and a new medical exam.  Your new premium could be significantly higher.

Are there flavors of Life Insurance, and are they suited to different situations?

There are many different varieties of life insurance, but, they mainly seem to circle around 2: Term and Whole Life.   Term insurance will pay a death benefit if and only if the death occurs within the term covered (usually 1 to 30 years.)   You might ask why this type is attractive, and it boils  down to cost-effectiveness.   (Just for a bit of context, assuming a healthy 30-year old woman,  might want a death  benefit of $500,000.  The whole-life policy might cost $3,750 per year, and a 30-year term policy, $300 per year.)  Parents who have young children are usually the ones who need to most consider life insurance.   But, when those “kids” are done with college and raising families of their own, it might not make sense to pay for the policy anymore. 

But, Wait, there’s More!!

So, due to the differing kinds of insurance products, it can be rather complicated to choose a policy.  To make things even more challenging, some policies can come with “riders.”  These are contractual provisions that can be added to the policy to add coverage for a variety of situations.   Please note that with each rider (generally) the cost of the policy increases.  Some of the more common riders include the following:

 Accidental Death Benefit Rider–>pays more for a tragic accident

Waiver of Premium Rider–> If the insured is unable to work, there is no need to pay premiums.

Accelerated Death Benefit Rider–> can be used to receive a partial death benefit that can be used to cover medical treatment.

Long-Term Care Rider–>Accelerated Death Benefits can, with this Rider, be allocated to pay for Long Term Care expenses.

There are a multitude of other Riders available, but this provides a nice sample of what is on offer.

How much Life Insurance do I REALLY need?

Just as the assigning of rates for Life Insurance is based on Risk Management, this question can also be productively approached from the same standpoint.   To get a decent estimate of your needs, take out a clean sheet of paper:

Add all of the expenses that you would want covered, if you were not there to support your family.  This might include income replacement, mortgage and college expenses for our children.   Deduct amount you currently have in savings or other life insurance policies.   Disregard retirement savings if they will be needed later.

The resulting number might be shockingly high.  But, if you are serious about getting coverage for your family, a free quote from a few reputable companies might not be a bad place to start.   If the premiums appear unapproachable, you might want to start at a lower level, but lock in the rate of a younger person.  You can very easily add more later, and this way, you can do so at your “locked in” lower rate.

What happens if my loved ones have to use the policy?

The claim will normally take between one week and one month to file and evaluate.   Unfortunately, it will fall upon your loved one to make the first moves.   First, they should obtain 3 to 5 certified copies of the Death Certificate (sometimes photocopies are adequate, sometimes not.).  Then, they need to call the insurer, and notify them of the death.  They can print and fill in a claim form and mail that in with a certified copy of the Death Certificate and any other documents required by the insurer.


Life Insurance Basics | III

Life Insurance Guide to Policies & Companies (investopedia.com)

How Does Life Insurance Work? – NerdWallet

How Does Life Insurance Work? – Forbes Advisor

How to Choose a Life Insurance Policy (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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