You’ve packed at least 3 things into your query. First, what is life insurance? Life insurance is a contract that you may enter into with an insurance company which causes a death benefit to be paid to your beneficiary when you trigger it. That is, when you die. The premium (what you pay for this contract) is never as large as the death benefit, and there is no other way that you can turn a little bit of money into a whole lot of money in a little bit of time – perfectly sized to the need, and at the exact moment it is needed – than with life insurance. Is this a simplified definition? Yes. Is it an accurate definition? Yes.
Second, how does it work? You apply, get approved, the policy is delivered, you pay for it and then, well, you know the rest. A bit of detail might help here. Term insurance is just coverage (the way auto insurance or home insurance is just coverage). It lasts for a period of time and then goes away or gets tremendously expensive after the level period of 10/15/20/30 years.
Permanent insurance, of which there are several flavors, lasts for the rest of your life so you can’t outlive it. Permanent plans come with a cash value component. You can use it to create a “bank” for yourself or you can simply use it to have a permanent benefit and ignore the cash accrual part. There is more but as with most things insurance, you can get down a rathole real fast with all of the various ways to manipulate the contract based on specific needs and desires. Think about that computer you are using right now. How many ways can you customize it? Software, hardware, networks, programs, browsers. You get the point.
Third, is it a smart move for you to “invest” in life insurance? Take that apart first. Is it a smart move? Yes, if you have someone who will have a financial hardship if you leave the planet. If you save up, and then you die, the amount needed may not match what is in the savings account. Example: you save $100 a day for 50 days. You die. Your loved ones get $5000, but they need $100,000. Oops. Or, you save $1000 a day for 50 days and then you die. They get $50,000. If the cost to get through life for them for 1 month is $2,200, the bucket of money will last for about 23 months. At month 24, they are in need. Oops again.
You used the word “invest” and that needs clarification. Should you pay a small premium to get jumbo sized protection for loved ones? A responsible person would do that if there was not a pile of cash laying around already allocated for this purpose. Should you “invest” in permanent life insurance to get a good return on your money? Maybe. Maybe not. I did. But that universe of need, affordability, future planning, policy type and features, plus time value of money (and some other things) pointed the way for me. I have 3 permanent plans. One makes it possible for me to pay for 10 years, stop paying, have the death benefit continue forever, and generate a PILE of cash in the policy based on a guaranteed interest rate that would impress you. If I die while smiling about all of that, my wife will do my smiling for me. Do I actually “invest” elsewhere? Yes; IRA/M-fund/and some others. Can either of those investments do what life insurance does? No. And that is why I have it!
| 02.19.15 @ 00:10