Life Insurance

Only buy guaranteed-renewable term life insurance from A-rated insurer. “Whole life” insurance, which accrues value over time, combines savings and investment with insurance. I have heard of no good reason to bundle those activities. But there are good reasons to avoid whole-life insurance, including:

  1. The insurer can embed higher fees.
  2. You expose yourself to credit risk of the insurer.  If the insurer fails then you could potentially lose the value of savings in your whole-life policy.  In contrast, if a term-life insurer fails you have only lost your most recent premium payment.  (Either way you are at risk of not being able to get a new policy in time.)

The purpose of life insurance is to protect those who depend on you being alive against catastrophic consequences of you not being alive.  Therefore, it never makes sense to insure child who does not produce income on which you depend.  It is not necessary to insure a homemaker if you can fall back on extended family in the event of their death for the essential services they provide.

As with all insurance, you pay a premium for protection (insurers generally make profits after paying claims and business overhead), so it is irrational to load up on more insurance than you need — unless you know that you are at a much higher risk of dying than actuaries think you are.

How much insurance is reasonable?  If a young family depends on your income, and you have no savings, then you should probably get enough insurance that your wife and kids could maintain their standard of living for 20 years (or until the children are independent) from the proceeds of a policy.  A healthy young man can get a 10-year guaranteed-renewable $2MM insurance policy for around $600/year.  After 10 years, hopefully he will have saved some money and his dependents will be closer to independence so he could drop his coverage to $1MM.

You should not buy insurance to provide independent heirs with an inheritance.  If you play your cards correctly you should Die Broke.  Older people should eventually be able to self-insure out of their savings.  Once they have no dependents they should eventually plan to purchase an immediate annuity to provide insurance against outliving their own savings.

Last time I bought a term-life policy I found the best contract through Zander Insurance Group, an independent insurance brokerage company that made the process as easy as it has ever been.

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