Should You Buy Life Insurance?

One financial consideration faced by most people seems to encompass more confusion than most. It is insurance.

There are many different kinds of insurance that must be considered, too, but I want to focus primarily on just one now. Life insurance.

Life insurance can be one of the most pressing dilemmas for a lot of us because it can often involves a lot of emotional considerations. This means that unscrupulous salesmen often can pull those heart strings to maneuver people into unreasonable decisions.

Unfortunately the result is the diversion of considerable amounts of money that could be used more effectively elsewhere. Consequently, when so much money is spent (or wasted) on life insurance, other important areas go neglected.

Experts who field questions about money are aware that the very first question to be answered before making any decision often passes without consideration at all. The first question to ask about life insurance is simply whether a person needs life insurance at all. Often the answer is, “No!” If you are aware of this issue yourself you may have observed a common situation.

A man asks what kind of life insurance he should buy. He is asked if he is married. He isn't. Does he have any dependents? No, none at all. Does he have enough saved to pay for his funeral? Yes. Still he is advised to buy life insurance.

Recently I was listening to Suze Orman taking a call from a woman who had no reason to buy life insurance at all. In addition she had considerable savings and investments. Her so called “financial advisor” was actually trying to get her to buy a large whole life policy instead of contributing to her retirement funds! Suze was understandably angered by this charlatan.

In such a situation the question becomes one of identifying the motivation a person has for buying an insurance policy. Often there is only some traditional notion that a responsible person is supposed to have life insurance. Nonsense.

Not only with life insurance, but with all forms of insurance it is critical to keep in mind the reason to spend money for that policy. A newer car needs coverage not needed as the car gets older. If the policy won't pay more than the value of the car what good does it do to pay for coverage that would be denied?

The same is true for people. As we get older we do not need the same life insurance coverage as we did when we were younger. My children are grown. They can earn their own way now so instead of having extra life insurance to help my wife raise the children if I should die, it makes more sense to invest more for retirement.

But assuming you do need to have some life insurance, how much and what kind should you buy. While term life is the only kind of life insurance I would recommend, I will examine that in more detail elewhere.

My goal here is not to recommend any type of policy, let alone any place to buy one. The purpose of this “understanding” step is to get us to start thinking critically about insurance and guide us toward some sources that will help us understand how life insurance policies work.

One good introduction to life insurance can be found on the University of Missouri Extension site. Check out the article titled Life Insurance Purposes and Basic Policies.

Take time to get a basic understanding of this topic before talking to any insurance representative, especially before considering a purchase.

Then do the same with any other kind of policy. Many are useless. Your goal is to understand what you really need and why before buying. Knowing that much, if not most, of the offerings out there are just barely legal and of little value can help us keep our money in our own pockets.

That does not mean we should never buy life insurance. Sometimes insurance is needed. That determination is based on whether anyone will be hurt financially by your death.

That is, are others dependent on your income, income that would no longer be available if you died. If you have enough savings to take care of them you do not need it. If you have no dependents you do not need it. If you have a couple of small children, a spouse who has few if any employment skills, and no significant savings, you need it.

This whole question seems so simple and obvious it should need no specific attention. But the unfortunate truth is that a lot of people buy insurance they do not need everyday. It helps the insurance salesman make a living but it does relatively little good and sometimes a lot of harm to the buyer. To sum it all up, if you do decide to buy life insurance, or any other insurance, make sure you have a good reason to do so.