The basic nature of insurance is a gamble. Life insurance is commonly thought of as a requirement for those with families. However, you may be better off going without.
The Business of Life Insurance
The common wisdom is that life insurance is a small cost that may mean a big difference to your family. In fact, that is the marketing tact that most insurance companies take. The reality is, they are not charitable organizations offering help to your family in a difficult time. Insurance companies are motivated by their own interests.
When you pay an insurance premium, your dollars are being invested behind the scenes to support the operating costs and profit margin of the insurance company. The company is making a bet that the consumers will send premiums that exceed the required payouts by the amount of the profit margin plus the operating costs. If the consumers spend less money than the company requires operating, or if policies require payouts exceeding the amount of the premiums, the insurance company will find itself out of business. Therefore, the longer you live (and pay premiums toward your policy), the better the odds are for the company to make a profit.
How You Can Win with Life Insurance
The consumer takes a gamble as well, in the form of opportunity cost. Instead of sending those premiums to the insurance company you could invest them yourself. If you are at least equally good at investing as the insurance provider is, you come out ahead. If you are better at investing, you come out significantly ahead, simply because you don’t need to operate an insurance company. You get to keep all of the profits generated by your investments. Knowing this, there seems little reason to consider insurance. There is, however, the possibility that you might die much earlier than average. If that happens, your investments will not have enough time to generate a supply of cash for your family. This is the situation in which life insurance can be very helpful to your estate.
Determining Your Real Need for Life Insurance
Evaluate your commitments, and determine if there are any scenarios in which your absence would create a financial burden. Consider commitments like mortgages and educational expenses for your dependents. How will those costs be met if you remain alive? Presumably, via your earning potential (your salary). The hardship derived from the loss of your income may or may not be significant. If you are bringing in limited funds to the household, adding the burden of life insurance to your expenses is illogical. If you are the primary breadwinner, protecting your family from the early, unexpected loss of your revenue makes sense.
Analyzing the real math of life insurance, versus the common sense, it’s clear that, while every situation is different, there is a simple and logical way to evaluate your family’s need to invest in life insurance. Your need for life insurance could easily change over the course of your lifetime. When making the decision about whether to buy, stay focused on the facts about your own financial position.