Home Life Insurance Remember the Main Purpose of Life Insurance

Remember the Main Purpose of Life Insurance

by My Journey to Millions

Sometimes I think people forget (or don’t care about) what the main purpose of life insurance is.  This post is going to ignore whether you should buy term or whole life, or whether you can create your own pension using whole life insurance, or whether you should buy life insurance on your young child, instead we are going to basics…to square one.

While meeting with a Planner today, he told me of a story that simply amazed me.  He was meeting with a prospective couple who was expecting a baby.  While both spouses worked the husband was the main breadwinner and there was no indication that fact would ever change.  While in this meeting the husband couldn’t understand why he had to obtain life insurance and actually used the words, “what’s in it for me?”

What is the Main Reason to Obtain Life Insurance?

Life insurance is not for the benefit of the insured.  It just isn’t.  In its most basic form life insurance is for the benefit of the insured’s family.  Life Insurance is used to ensure (pun intended lol) that the insured’s family is covered for expenses.  The amount and / or kind of expenses are less important only for this conversation.

Agree or Disagree?

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Kevin M 07/08/2010 - 9:43 am

I hope his wife gave him a good slap on the face after that comment.

Darren 07/08/2010 - 1:07 pm

Agreed. What’s in it for him is that if he died leaving behind expenses, his family would be taken care of financially.

That was not a good question that he asked. It’s not about him at all.

Aaron 07/08/2010 - 4:02 pm

Agreed. Life insurance is for the living you leave behind. It’s the best way to tell your family you give a d* about the responsibilities you can’t fill when you’re not around.

But rather than telling people in person, I found asking them why they might need it a more effective way to get them to understand.

AM 07/08/2010 - 6:35 pm

Just wanted to point out the hilarious typo. Where can I get some of that “whore life” insurance you speak of? 🙂

Evan 07/08/2010 - 6:46 pm

HAHAHAHHA AMAZING! I had a moral dilemma whether to fix it. That’s what I get for writing a post at the hospital lol

Financial Samurai 07/10/2010 - 8:26 am

Thanks for the reminder… I think! Did anybody ever really think otherwise though??

Funny about Money 07/10/2010 - 12:23 pm

Well said!

My ex- bought whole life policies shortly after we married, one for himself and one for me. These he imagined were an investment because, after umpteen berjillion years of monthly payments, the premiums eventually cost less than the policies’ annual return.

When we divorced and I discovered I had one of these things, I thought I should cash it in — it looked to my eyes like a clear & present rip-off. He strenuously urged me to keep it, because by then it was earning more than I was paying for it and, said he, therefore it was a great retirement investment.

More years passed. Finally, laid off from my job, I conferred with my investment advisers. For the first year of survival money, they recommended that I cash out the amount in the policy that remained tax-free (about 10 grand), and then that I roll the rest of it into my big IRA, where it could be invested in something that would actually earn a return. With a little math, they demonstrated that the policy was earning less than my impoverished credit union was paying on its CDs! Some great investment, eh?

The reason it seemed to be earning more than we were paying for it was simply that we weren’t paying very much.

Amazingly, this man had a sophisticated education. He was (and still is) a corporate lawyer with one of the most high-powered firms in the Southwest. So you don’t have to be a naive soul with a GED to be led astray by insurance sales pitches.

Life insurance isn’t an investment. It’s a hedge against disaster if you have dependents. If you have no dependents, you don’t even need term insurance…unless, of course, there’s not enough in your savings to bury you.

MJTM Buddy 07/15/2010 - 11:22 am

I’m a huge fan of MJTM and generally dont post, as I just enjoy reading the articles (and also because when I post, I generally write too much…which I’m about to do). I’ve realized that reading the comments to the posts about life, love and pursuit of happiness is completely personal and opinionated – therefore completely acceptable; however, NOTHING pisses me off more than when people post comments regarding personal finance as if it was fact, when any decent financial planner would tell you that there is no such thing as a “bad product” or “rip off”. If they don’t tell you that, get another planner! So hearing this last post hit a big nerve.

First of all, I am a financial planner. 40% of my income comes from insurance advising and the rest is investment & financial planning. First of all, there is no holy grail. There is no one true answer to financial prosperity, and if there was, don’t you think we’d all be sitting under palm trees right now sipping pina coladas??? Everyone’s situation is completely different, which is why there are different financial products geared to fit different situations. So is whole life insurance a rip off? Only to the people who either do not understand it (because of a lousy insurance agent, their parents didn’t understand it and therefore improperly advise their children, or simply they just didn’t listen) and were sold a product that did not fit into their own situation. I could go into the fine details about this topic for hours, but more to my point:

Don’t knock a product if you don’t truly understand it (and if you want me to explain it further, I would love to). If you take a look at the extremely wealthy, most (not all) of them own 2 things – real estate and whole life insurance. The IRS puts funding limits on life insurance because they know it’s benefits. If you look at every major bank, their balance sheets shows 10-30% of their assets as “Bank-Owned” whole life insurance (BOLI). Clearly these guys don’t see it as a rip off, do they?? Why don’t they just invest in CD’s??? Again, its the people who either shouldn’t have had whole life insurance in their plan to begin with, or just don’t understand the product and see it as a rip off.

I’ve met with hundreds of people who need permanent life insurance in their plan but refuse to do so because of the media (Suze Orman is NOT GOD, I promise you), or because of testimonials from others in different financial situations; and wind up only hurting themselves and their families in the long run. Now are they really hurting themselves? No…they might not be as financially efficient, but they’ll survive (or at least their heirs will). But don’t knock it because it most likely didn’t belong in your own plan to begin with and some d-bag salesman was a “nice guy.”

J 02/25/2011 - 1:46 am

Life insurance serves several purposes. A sufficient amount of it can provide for your family and or loved ones after your demise. It can also help to pay for your funeral costs. It can be part of your estate or it can be in place of an estate for those who have no estate to leave behind. If the policy is a whole life as opposed to term, it will build up cash value which can be borrowed against, or even cashed in if need be.

Nancy 09/01/2011 - 3:49 pm

Yes, its sad that many people still do not understand the main requirement for life insurance, i.e. to provide for one’s family. There’s the need for more financial education out there.



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