Is Life Insurance a Scam?

Is Life Insurance a Scam?

Life Insurance

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If you have ever traveled to a major city and stared at the skyline you’ll see some of the world’s most beautiful, and tallest buildings. Have you ever wondered what is in most of these buildings? For the most part, they are usually some sort of financial institution or bank. These companies offer all sorts of products that go way beyond your basic checking and savings accounts. One of their most profitable products just happens to be life insurance. Life insurance policies are why these companies have their names all over pro-ball stadiums.

Life insurance is a tricky topic as it can be a great tool to minimize risk for a select few. For the majority, it is useless. I’m sure we have all had an individual approach us and tell us how we need life insurance. While I respect the hustle, all they are trying to do is get a commision check off of you. That statement will rub some people the wrong way but it’s the truth. If you take anything from this article remember this: life insurance is not a good investment, it is a risk management tool. There is only one time where it could be a good investment and that’s if you have an extra $1,000,000 sitting around. I’m going to make an assumption that you don’t so we won’t even touch on that side of things.

What is Life Insurance

Before we get into if you need it or not, you must understand what life insurance is. When you buy life insurance, you enter into a contract that says you will pay a certain amount of money per month and whenever the insured dies, which may be you, the beneficiary will get a payout. The amount you pay per month, or premium, is statistically calculated by the insurance company. Again, there’s a reason their offices are in skyscrapers. These companies have data on thousands of people so their ability to predict what they bring in vs. payout is a fine-tuned science. There is no guessing.

Policy Types

There are two types of policies: term and whole life. Term life is the cheapest and the most appropriate for the majority. With term, you pay your premiums for a set number of years. 10 years is what most people choose but you can go up to 30. One of the potential cons of term life insurance is that when your term expires, there is no cash value. I say this is a potential con because while the beneficiary doesn’t get any of the payouts, the insured is still alive. This restates the important fact that life insurance is a risk management tool, not an investment!

Whole life insurance is exactly how it sounds, you pay for your whole life. There are a couple different variations of whole life but to keep it simple, they all do the same thing. Whole life is much more expensive per month than term since there is always a payout when the insured dies. You can, however, get a special type of contract that allows you to pay less in the first 5 years and progressively more after that but overall it averages out. Chances are you don’t need whole life. If you don’t have an established emergency fund, a maxed out 401k ($18,500 yearly), and Roth IRA ($5,500 yearly), then don’t even think about it. There are advantages of whole life when it comes to tax planning and wealth distribution but that really only applies to the top 10% of earners. If you are under 50, chances are you aren’t one of those people.

The question still stands: is life insurance a huge scam built to prey on the uninformed? The truth is, no. In fact, there is a time and place where it can be extremely important. Here are my top reasons.

  1. My top reason is if you have just started a family or bought a home and only one person is the breadwinner. Unfortunately, accidents happen and you can minimize the risk of leaving your family in a tricky spot with bills by getting a term life policy. 
  2. Bills don’t just mean your groceries and gas. It also includes larger debts like mortgages and car loans. According to LifeRates.com, 33% of people say they would have a financial disaster and potentially lose their home if a partner passed away. Term life can help eliminate this stress.
  3. Peace of mind should be something that we all strive for. Even if you have a fairly stable financial situation and your family has more than one source of income, a term life policy may bring you that extra peace of mind.
  4. If your work offers group life insurance, and it’s free, then absolutely join. Just make sure you get your paperwork turned in. Company policies can range drastically but it’s not absurd for them to pay out $25,000 to your family in the event of your death.
  5. Lastly, term is cheap. Yes, your beneficiaries may not get any payout but again, that means you are alive!  They are the most flexible, easy to understand, and most of the time you don’t have to get a medical examination. If you have any sort of dependent, even if it some older family you take care of, I’d suggest it.

There are additional items that could be added onto this list but this will cover 90% of the reasons you should look into life insurance.

Do you have life insurance? What was your reason for getting it?

I’d love to hear your thoughts below

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