There are several schools of thought about life insurance.
- The best thing ever.
- Good but not necessary.
- Useful for some people but not others.
- Take it or leave it.
- A total rip-off.
- Don’t know anything about it, and don’t want to know.
- I might buy it, but then I’d have to think about dying, and I don’t want to do that.
Much of the neutral and negative attitudes about life insurance can be traced to two sources–traditional types of life insurance, and the old stereotype of very aggressive salesmen.
Fifty years ago, about the only type of life insurance sold in this country was traditional whole life. It was fairly expensive and tended to have quite low death benefits. Anybody with the ability and self-discipline to consistently save money would likely have been better off without it.
Another factor that has caused negative attitudes about life insurance is traditional term insurance. Some people look at this model and conclude that you basically get cheated if you outlive the policy.
I know that everybody has individualized reasons for thinking the way they do, but I have talked to people who disliked life insurance simply because they didn’t understand it. So the purpose of this post is to try to help people understand possible reasons for buying insurance.
Peace of Mind
I sometimes say that I sell “sleep insurance.” That phrase can refer to things besides life insurance, but it means that you’ve done something or have something that allows you to go to sleep, instead of worrying. Life insurance gives the assurance that tragedy, however unlikely it may be, will have a silver lining. Even self-proclaimed psychics don’t claim to predict everything in life, and we never know what might happen. Some people sleep better when they know that their spouse or children will have the money to do a certain thing after their death.
Plan for Living, not for Dying
The various types of life insurance that build cash value can be very helpful in case of emergency. I’ve been seeing news articles lately about how many people are borrowing from their 401Ks because they can’t get needed money anywhere else. But that can be risky business. If they can’t pay the money back, they’ll likely have to spend money paying penalties to Uncle Sam. On the other hand, somebody with cash value in their life insurance policy can borrow from that. Of course there are risks that way too. It’s not something to be done lightly or carelessly. But it can be a handy option at times.
If you have a lot of cash value built up, borrowing from it can be done for other reasons. Here’s a way that tends to appeal to the “forced savings” type of people. Say you borrow $20,000 from your policy to buy a car. Naturally, the loan charges interest. But because it’s from your policy, you are effectively charging yourself interest, and thus in the long run you will wind up with a little more value in your policy than you would have otherwise.
The ability to borrow from cash value is part of the things called “living benefits.” This means anything and everything that allows you to gain benefit from your life insurance policy while you are alive. There are things like critical illness riders, which allow you to get an advance on the death benefit in order to pay for a serious illness.
Life insurance has come a long way in the last several years, and insurance companies have gotten quite creative. So much so, in fact, that they are beginning to see people buy life insurance primarily for the living benefits side. For some policies, the death benefit is actually beginning to be more or less just a really big bonus.
Life insurance can be used as a way to pass money between generations untaxed. Tax stuff gets complicated, and when someone dies there can be different types of taxes involved. But this one thing you can take to the bank–a lump-sum life insurance payout is never subject to federal income tax. In my opinion, that’s one of the best reasons, and certainly one of the least known, for buying life insurance.