Information from the Readership: Life Insurance

Nov 8, 2006 by

I just got an excellent comment from a reader, so I figure that I should bring it to the forefront of this blog. The reader described life insurance in depth. I have pasted the comment below.

Ceci Says:
November 8th, 2006 at 6:15 pm e
Insurance lingo is also a bit difficult to understand. For your readers, here are a few examples:

Term insurance: This is the cheapest, simplest kind of life insurance. Buy a policy for a set term (typically 10 or 20 years) and if you die during that time, your beneficiary will receive the benefit.
Whole life: This is the simplest type of permanent life insurance. Your premiums remain the same throughout the life of the policy, and a portion of each premium is invested by the company, allowing you to accumulate this money (the cash value) on a tax-deferred basis.

Universal life: This has the same basic features as whole life, but is a bit more flexible. If you choose, you can pay in amounts above your regular premium, and adjust the death benefit relative to the cash value amount.

Variable life: With a variable policy, you get a choice of different funds where the company will invest your money for you. Generally, if the investments do well you’ll have a higher death benefit and greater cash value. It they don’t do well, you’ll have a lower death benefit and cash value, though some policies guarantee a minimum death benefit.

Variable universal life: This combines the flexibility of adjusting the amount of the death benefit and premium (as in universal life) with the ability to take a little more risk in investment choices in the hope of getting a bigger return (as in variable life).

Bottom Line: While complex at first glance, life insurance need not be overly confounding. If you understand your choices and are clear about why you’re buying life insurance in the first place, the right option for you will be obvious.

I found that comment to be rather edifying, and encourage readers to provide similar, high-quality comments. So, who needs life insurance in the first place? People that have dependents who depend upon their income need life insurance. For single people not supporting their parents or children, life insurance is unnecessary.

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  1. It is too strong to say that life insurance is unnecessary for single people with no dependents. What this doesn’t consider is the financial burden that death or illness can place on the loved ones of uninsured singles. They may have no obligation to pay for burial or medical treatment, but very often family members do step in rather than leave things to “the state.”

    When I reached adulthood, my mother presented me with a small SBLI whole life insurance policy that she expected me to pay for 20 years (at which point it was fully paid up and its interest would sustain it). When I asked why I needed it, she explained “If you die, I can’t afford to bury you.”

    I was recently talking to a friend who is financially strained because her mother had not re-evaluated her life insurance needs since the ’70’s. The result was that her policy was inadequate to meet today’s costs of burial.

    I suspect that the same may be true of my small policy, but it no longer matters. My financially astute mother also strongly recommended taking full advantage of IRAs and 401ks. So at this point, retirement assets that would no longer be required to support life in retirement would more than offset burial costs.

    I would restate your conclusion: “Life insurance is unnecessary for singles with no dependents so long as they have sufficient assets to cover costs of burial and other expenses related to administering the estate.”

    An exception to this is if you know that your heirs are financially able to handle expenses without hardship.

    Things do change over time, so you need to periodically re-evaluate your decisions.

  2. Selene

    People may feel that “life insurance is unnecessary for single people with no dependents” in the United States, because you don’t have the kind of life insurance policy which creates the right incentive for people.

    In Taiwan, we have so-called “Savings Life Insurance”. It is a life insurance policy because you pay a definite amount of premium based on your age, and your beneficiary will receive the lump-sum payment once you decease. However, the difference is, you (the insured) can also receive cash back while you are still alive. This cash back is usually paid after the first 5 years of the policy, and then paid every year until you decease. So it is sort of like a combination of a life insurance policy and a forced savings account. Better yet, you only need to pay your premium (assuming no default) for a certain number of years (e.g., 30 years), and you can receive the cash back payments for as long as you live.

    This kind of savings life insurance policy should provide incentives for everyone to participate, and to participate at the earliest young age when possible. I held such a life insurance policy when I lived in Taiwan. However, I don’t have any life insurance policy in the United States now, because I feel that the terms are so much worse and it’s not worthwhile.

    I wish the American insurance companies can open their eyes and provide this kind of savings life insurance product. I am sure many people will benefit from it.

  3. save-any-day

    Always VW says :
    An exception to this is if you know that your heirs are financially able to handle expenses without hardship.

    Did Michael Jackson knew what was coming ?

    Insurance is to systematically derisk your capability to self sustain irrespective to how ever good situation you are in.

    Natural calamities across the nation , like a earth quake, Tusnami or a war can easily destroy people & property around. & in coming days we are more clsoer to scuh a possibility.

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