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What is Life Insurance For?


Back before I became a financial planner, I never really thought about life insurance much. I knew I needed some. As least I think I knew that. I used to just max out my employer's offering and call it a day.

But then I got married, and had kids, and became a financial planner. That's when suddenly I feel like I think about life insurance ALL. THE. TIME. 

Why is that? Because I've come across so many clients and prospective clients that have inappropriate life insurance coverage. Either they have too little, or too much (yep, that's possible), or the wrong kind of policy. And then on LinkedIn today, I saw a sponsored post titled "Reasons Millenials Invest in Life Insurance". My head exploded. Why would the average Millenial INVEST in life insurance? 

Let's get one thing clear: I believe life insurance is something you PAY for, not something you INVEST in. The LinkedIn post mentioned unplanned medical expenses, leaving a legacy, and secure education funding as reasons to INVEST in life insurance. 

I'm not going to go into a long-winded explanation of various kinds of life insurance, but there are basically two types. The kind you PAY for, i.e. term life, and the kind you "INVEST" in, i.e. not-term life (whole, variable, universal, etc). If you'd like to understand more, here's a great Forbes article. Which brings me back to the point of my post. What's it FOR?

I believe life insurance is for insuring you against financial hardship your financial dependents may face were you to pass away during the time they depend on you. There are rules of thumb as to how to calculate how much you need - the Forbes article above has one, and you can also use an online calculator like the one at LifeHappens.org

But one thing life insurance ISN'T for, is an investment. Or a way to pay unplanned medical expenses, or leave a legacy, or pay for education. 

Why do I get so passionate about this? Because life insurance earns commissions for those who sell it to you. The amount of the commission varies, but it's a huge percent of the first year's premium (think 70-90%). Honestly, I don't care how much commission the agent for my term policy makes, because the value is the value. But in the Life-Insurance-is-an-investment camp, does an "investment" that has basically no cash value the first year seem like a good investment?

There are situations where non-term life insurance policies might make sense. Just not usually for my clients. I like to recommend investing in the best place to help my clients reach their goals - according to the goal.