As I’ve stated before, I have a natural built-in aversion to many insurance products. Mainly, this is because they are so heavily marketed and advertised (and you know how I feel about that). I just am usually not convinced that we need that much protection.
I’m not saying we don’t need any insurance. We actually need quite a lot of it.
- If you drive, you need car insurance.
- If you live in anything other than a tent, you need renters or homeowners insurance.
- If you enjoy living long and well, you need health insurance. Disability insurance is also a good one here.
- If anyone depends on you, you need life insurance.
Though it’s who provides that last one that can have some interesting flexibility.
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Life insurance has a branding problem. It’s really “death insurance”, but that’s a little harder to sell.
Also, insurance against something that’s going to happen is a little bit of a tough sell too. While you’re very likely to get in a car accident at some point in your life, you might not, and car insurance banks on that.
No such luck on the life insurance side of things.
The question is: from a purely financial perspective, what effect does you dying have on others?
If you have a spouse or children or parents you take care of, the answer is: quite a lot.
Why life insurance?
The goal of life insurance is to replace your income for others if you are no longer around to provide it.
The key there is that you get life insurance when you are not otherwise able to replace your income if you are no longer around to provide it.
The simplest and best kind of life insurance that I’ve found is a the simple payout plan (also known as “term insurance”): if you die during the policy term, you get X dollars. The theory then is that your beneficiaries would take that payout and invest it wisely, thus providing a recurring stream of income, thus “replacing” your income.
You can usually replace an annual income with 8-12 times that amount in investment. So if your salary is $50,000, then it’s good to have between $400,000 and $600,000 in term life insurance. (This depends on rates of return, but it’s a good rule of thumb.)
But the term only lasts for a period of time, usually 10-20 years. And the older you get, the more expensive the insurance gets, so buying another policy could be prohibitive. (Which makes sense, if you think about it. Would you insure an 80 year old against dying? I didn’t think so.)
First National Bank of You
But what if, given the above example, you had $400,000 to $600,000 in the bank?
You wouldn’t need life insurance then.
As you work the plan I talk about here, getting out of debt and building wealth, the goal is to eventually get to a point where you have this amount of savings, either in retirement benefits or some other plan.
In a sense, your goal to become your own insurer.
And once you get to that point, you could provide that money to your beneficiaries, and save yourself a large monthly fee in the process. Not bad.
Don’t try this with anything else
Technically, you could do this sort of thing with other insurance, but the risk potential is much worse. For example, you could go without health insurance and just pay for your services, but the amount you could potentially owe is, well, infinite. Medical costs are insane (and the leading cause of bankruptcies in the U.S.). Don’t bother.
But the amount of benefit provided by life insurance is attainable. It’s not easy, of course, but it’s possible. And wouldn’t it be nice to be your own insurance company? No advertising necessary.