You Never Out Grow Your Need for Life Insurance

The insurance rating company, A.M. Best & Co, reported that less than half of all American households have any life insurance other than that provided by an employer. Why have so many Americans turned their backs on life insurance? There are several answers to that question.

With all of the media focus on living longer and preparing for retirement, Americans have shifted their concentration toward saving for retirement by putting their money into tax-favored accounts. Life insurance companies have been marketing the investment aspects of policies rather than death benefits in spite of the fact that most consider life insurance a poor investment choice. Class-action lawsuits against insurance companies alleging product misrepresentation have also contributed to life insurance earning a bad reputation.

The chief reason to buy life insurance is the protection it provides through the death benefit. The proceeds your beneficiaries receive can replace the income they lost as a result of your death and provide for future needs, such as paying for a child’s education. Investing in the stock market is not a substitute for life insurance. For one, life insurance guarantees a return for the money you pay in premiums. Even under the best market conditions, you are never guaranteed a return on the money you invest in stocks or mutual funds. In fact, most brokers advise that you invest only money you can afford to lose. Even if you do manage to assemble a stock portfolio that provides a reasonable rate of return, that return must accumulate over time in order to grow large enough to cover your family’s long-term needs. The problem arises if you die before amassing the amount needed. With life insurance, the death benefit is available whenever you die.

The other issue with leaning on a stock portfolio to cover long-term financial needs is that portfolio values never remain constant. As market conditions change, so does the value of your stock portfolio. If the market happens to be in a down cycle when you die, asset values will be reduced at the time your family needs them the most. If they have to sell assets, not only will they fail to net as much money as you would have hoped, they will also have to pay taxes on any capital gains. With life insurance, they can receive death benefits tax-free and with proper planning, they will avoid paying estate taxes on the money as well.

Talk with your insurance agent to determine how much insurance you need to best protect your family’s finances in the event of your death. And never overlook the death benefit value of life insurance.