When to Skip Life Insurance
Most people realize their need for life insurance the more they contemplate about their death. In a way, it is a kind of morbid financial service. You pay monthly premium so when you die, your family will have funds approximating your income when you were still alive.
In short, life insurance is a replacement plan. If you die, your family will have money to keep things together and avoid suffering from a massive financial crisis. Your children will not have to drop out of school and your spouse will not need to juggle several jobs or sell possessions.
A closer look at life insurance
A lot of insurance customers fail to comprehend the basics of life insurance. In a dictionary sense, it is not really insurance. You are not insuring anything. It is more about hedging your bets than anything else. Your good health and life are always preferable, but if fate has other plans, at least your family can avoid financial catastrophes later.
However, since life insurance is marketed as insurance, some people think that more coverage is automatically synonymous to better benefit. This puts life insurance on the essentials list and often translates to one’s capacity as a responsible adult and breadwinner. After all, everyone wants to secure their loved ones, right? This is why some people insure everything that moves. But remember, the point of life insurance is to replace income. How many people earn in your family?
Calculating the benefits
In a conventional sense, life insurance is never an investment. For example, if you purchase a term life insurance and stay alive until it expires, you will earn nothing from your policy. Some people know this; others do not.
Those who are uncomfortable with this concept fail to understand the foundation of life insurance: it is a replacement plan – a financial service that will not give you any profit. But they still want something in return. So the industry came up with whole life insurance and universal life insurance that offers a cash value beyond the death benefit of a standard term policy. You pay more premium each month than you would with a term policy and the difference builds and can be redeemed when you please.
It sounds good but this can only make economic sense if the cash value increases quickly enough. But investing and insuring are two different and usually incongruent goals. If you want to invest your money, there are far better ways than life insurance. Having a hybrid will not satisfy your goals.
In summary, there are instances when buying life insurance makes sense. If you want security for your family and face certain risks, go ahead. Some specific needs are effectively met by a good policy. Just make sure you understand the concept and are not mistaking insuring for investing or anything else. Otherwise, you are only wasting money and are better off skipping life insurance.