Since getting into the business, I have often wondered why people do not have life insurance. To me it seems like a necessary purchase. According to LIMRA,85% of consumers agree to insurance as a necessity, yet only 62% say they have it. LIMRA goes on to add that policy ownership is at an all time low from 50 years ago. Why is this happening? Most of the time the reason is price, even though it’s usually cheaper than preconceived. I have concluded that one possible reason is that it’s not required by law like other types of consumer insurance products. Think car or homeowner’s insurance for instance. Even though many people will never use their car or home insurance it is guaranteed that everyone will use their life insurance if that insurance is in force for one’s entire life. You are your most valuable asset, not your car. So why then is it not required to have life insurance?
I read a Forbes article that tells the reader why life insurance isn’t necessary at all. The author points out that you don’t need insurance because: “First, when you and your spouse have accumulated enough assets and income streams to independently care for yourselves. Second, when your children are self-sufficient adults. Third, when your estate is too small to owe estate taxes or liquid enough to pay the estate taxes.” Read it and be ware. The article does not outline intelligently why you should not have insurance. In addition it indirectly points out, in my opinion, one of the major problems with the insurance and personal finance industry: a complete ambivalence to the worth of human capital and a false reliance on traditional forms of non-physical assets, i.e. the stock market. This is not the author’s fault, it’s a result of 2 things.
- One being life insurance is not an asset, you should not be able to profit from it in a traditional sense. Meaning it’s not sexy and moody like the stock market; think Wolf of Wall Street. It’s not attractive to buy, you can’t watch it go up and down on E*Trade daily, and the strike it rich gold rush aspect just isn’t there. Unfortunately, reliance on the sexy lubed-up stock market is still the end all be all of financial advising. Maybe this is because the commissions are higher with stocks and mutual funds than with insurance, or some thing else perhaps.
- Second, is that no education or experience is needed to sell insurance. So the field is swamped with gimmicky, sales-y, greasy, people who pysch themselves up every day to sell more and more policies not caring about creating a financial plan for the client, because they don’t know anything about finance and they have to make their sales numbers.
We may never know exactly what the reason why the industry is declining (or people aren’t buying). We can deduce that uneducated salespeople and our need for instant gratification is not helping.
Further down this road, I can also say that the stock market is just not for the average working person to a large degree. To that person who works until they are 70 at an average job with a large company, their retirement rarely sees over 1 million dollars. In fact Smartasset.com has a scary article that infers the average person is not in the game at all:
Almost 50% American households have no retirement, 401(k)s, or IRAs. The Government Accountability Office (GAO) states that around 29% of households age 55 and older have neither retirement savings nor a pension.
So a significant number of people have no life insurance and hardly a retirement plan. They just work until they die. This only goes to prove that the worker and their ability to earn an income is the most valuable asset they have. So why not protect it?
First thing that comes to mind when reading the Forbes article is the aversion towards savings, financial education and the basic principles of investing. Those topics will be covered in another post, but for now I think I can use an insurance term to describe my point. With insurance, your beneficiaries will receive more money than you paid into the contract almost 100% of the time. This is because of the aleatory nature of the contract. Investopedia explains:
Aleatory contracts are historically related to gambling, and appeared in Roman law as contracts related to chance events. In the insurance example, this is because the payouts to the insured are unbalanced. Until the insurance policy results in a payout, the insured pays premiums without receiving anything in return besides coverage. When the payouts do occur, they can far outweigh the sum of premiums paid to the insurer.
Ranting aside, here are my four reasons to buy life insurance:
- The loss of income or ability to earn money is more crucial to an individual, family and/or legacy than riding the highs and lows of the market over a 40-50 year period.
- Insurance is not an asset. However the earlier you buy the cheaper it will be, thus it follows one of the most basic axioms of investing -buy low.
- Insurance is aleatory, meaning your heirs will gain (tax free) much more than you have ever paid in. Thus it follows another axiom, sell high.
- Insurance is not an asset. However, if structured correctly, it could guarantee a healthy supplement to your retirement income while providing that aleatory death benefit.