Why Buy Life Insurance

This Q&A is the first in series of conversations we had with money personality Terry Savage.

TIAA-CREF (TC): What do you tell your listeners about buying life insurance?

Savage: Few people would turn down a bet on a horse race or a stock market tip if they knew, for sure, that it would pay off. It’s just human nature to want to bet on a sure thing.

Here’s what I tell people about life insurance: It’s a sure thing. None of us gets out of here alive, so eventually your life insurance will pay off as long as you keep it in force. You just don’t know when. That’s the only uncertainty in this deal.

But since none of us knows when our time will come, it’s important to start thinking about covering the possibilities when you’re young and healthy, while an insurance company is willing to take the other side of that bet at a reasonable cost to you.

Remember, the insurer doesn’t have any better idea of when than you do, so they spread their risk by insuring many lives, figuring that statistics will allow them to make money on the entire pool of risk.
That allows you to sleep well at night, knowing that your risk of facing an untimely death is at least covered by life insurance.

Many people are quick to argue that there is a BIG difference between the risks of placing a bet on a horse race and buying life insurance. If you win the horse race bet, you get to enjoy the money! But you won’t be around to see the life insurance payout. That will go to your heirs, presumably your family, loved ones, or a charity you designate.

TC: What do you tell someone who is not sure if they need life insurance?

Savage: If no one is depending on your income, currently or in the future, then you might not need life insurance – provided you have enough savings to pay for a funeral service, or perhaps a small policy that comes from your employment will cover those final costs. Then again, your company-paid life insurance may disappear if you lose your job, so you might want your own policy after all.

The real need for life insurance comes when you have a family. Then you need to start thinking about not only the immediate need for cash in the year of your death, but all those years ahead, when a mortgage must be paid, when college costs come along, and all of the other expenses of raising a family will face those you leave behind. Or when your aging spouse might be left without your pension to supplement her income.

TC: Do you have any tips to help people determine how much insurance they should carry?

Savage: While it’s relatively easy to calculate the value of a salary that should grow over the years, some potential losses are not only priceless, but rarely calculated. How do you replace the services of a mother, who raises the children, drives the car pool, cleans the house, and generally loves and nurtures the family? Someone will have to step in – and likely at a significant financial cost.

It all adds up. And that’s the most basic reason to purchase life insurance – because you care about those who are dependent on you, and would be left without resources in your absence.

Adding up those potential costs is simple math. You don’t want your loved ones to suffer financially by your absence. You need to ask yourself: How long will they keep living like this, and how much money will have to be provided to make that happen?

TC: Other than protecting loved ones, are there other times you recommend life insurance?

Savage: Of course, there are other reasons to buy life insurance, reasons that go far beyond simple risk coverage. There are estate-planning reasons to hold a life insurance in a trust, in order to pay the hefty taxes if you die wealthy. And some buy life insurance to fund charitable bequests.

Others buy life insurance even though they don’t have a current need for coverage. They presume that one day they will have dependents, and that starting early will not only build cash, but make sure they are insurable. My advice is to first take maximum advantage of tax-deferred growth in retirement accounts, such as a 40l(k) or IRA where your money will grow faster, since mortality costs (the price of the actual insurance) and other fees won’t be taken out of your retirement account as they are with life insurance. And, if you aren’t healthy enough to qualify for life insurance, it’s doubtful you will want to start a family!

TC: Under what circumstances should someone not buy life insurance?

Savage: Similarly, avoid buying life insurance on young children. In the horrible eventuality that it pays off – your child dies before you – what would you do with that money? And if you’re doing it to save for college, a 529 College Savings Plan is a far less expensive and more flexible choice for growing tax-free money for college.

Life insurance has an important place in your financial plan. But for most people, the simple reason for buying life insurance is to protect the people they love from financial need if death comes unexpectedly early. That’s a thought that should motivate you through the process of choosing the appropriate amount of life insurance and type of policy.

TC: Any final thoughts?

Savage: I’m superstitious about life insurance – and you should be, too. No one likes to think about mortality. But, now that you’ve given just this fleeting thought about what would happen to those who depend on you, you’re tempting fate if you procrastinate about buying life insurance.

Life insurance doesn’t have to be complicated. And it certainly doesn’t have to be expensive. But the first step is simply recognizing the need and getting started. That’s The Savage Truth!

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