Life Insurance: The Vegetables of your Financial Diet
September is Life Insurance Awareness Month, which is as good a reason as any to cover the important topic. I know that it’s pretty hard to get jazzed about insurance, because it is essentially the vegetable portion of your financial diet.
Who wants vegetables when we can gobble up the sizzle of investments? When I told my publisher that I wanted to include a chapter in my book, The Dumb Things Smart People Do With Their Money, devoted to insurance, she sighed and said, “I guess if you have to…” That statement sums up our relationship with insurance: we know we need it, but hate the idea of spending any time researching or buying it. Here’s how I described it in the book:
“As a consumer product, insurance is painfully, atrociously boring, not to mention thankless. You pay good money now, yet you might never receive a benefit in the future. The only way you do is if something totally awful happens to you. How compelling is that?” Not to mention that life insurance requires you to contemplate the worst possible of all bad things, death.
Yet, ignoring an uncomfortable subject does not make it go away. According to a 2019 study conducted by the life insurance industry’s non-profit Life Happens and the research organization LIMRA, families can suffer grave consequences from not having proper coverage. Four in 10 households without any life insurance would have immediate trouble paying living expenses if their primary wage earner died. That makes perfect sense, considering that the Federal Reserve has found that just 61 percent of adults would cover a $400 unexpected expense using cash on hand.
The LIMRA survey also found a gap between those who believe they need insurance and those who actually own it. What explains the disconnect between knowing you need something and not addressing that need? The study’s analysis notes “Affordability and value are two obstacles that deter consumers from purchasing life insurance. If more consumers understood life coverage affordability, more consumers would shop for coverage.” While that may be true, the industry itself can often be its own worst enemy. Consumers are flummoxed by complex and heavy-handed insurance sales pitches, not to mention dense policy agreements and disclosure statements. And of course, insurance fee structures often require a special decoder ring to unravel.
There is one product that is easy to understand and affordable: term life insurance. The good news is that term is the best and most appropriate coverage for the vast majority of Americans, who have a specific insurance need for a defined period of time, like a couple with kids who have not yet saved a sufficient nest egg to support their survivors in the event of premature death. You can find online competing quotes for a term policy in minutes. Just remember that the death benefit should cover living expenses for survivors; the lump sum amount necessary to fund future educational expenses; and/or money to provide for the future retirement needs of the surviving spouse.
According to LIMRA, 71 percent of purchasers bought term policies, but another 44 percent bought permanent policies, which are far more expensive, because they combine the death benefit with a savings or investment component and it remains in force until you die. If a salesperson it making a hard pitch for permanent coverage, consult a fee-only financial adviser, who does not sell insurance, but can evaluate your needs, determine the right type of coverage and refer you to a reputable life insurance agent. Finally, your insurance needs change over time, so if you have a major life event (marriage, divorce, children or a death), revisit your coverage.