September is Life Insurance Awareness Month, so we would like to make you aware of the lone appropriate use for life insurance.
Like all insurance, we view life insurance as a transfer of risk. We all bear certain risks, such as the risk our car is damaged in an accident or the risk that we become seriously ill. Most people carry auto and medical insurance to shift these risks to an insurance company. The appropriate use for life insurance is income replacement for those who depend on another person's wages. Sadly, a common cause of homelessness is the death of a household's primary source of income. For anyone in this situation, life insurance is a must-have.
However, life insurance is often sold as an investment, and on these merits, it performs poorly. Nobody views auto or medical insurance as an investment, and for good reason: the profits go mostly to the insurance company, not to the insured. This is the same for life insurance. Insurance companies have statistical geniuses working hard to ensure the company earns a reasonable profit after paying all its claims and administrative costs. That leaves very little for the “investors.” Insurers invest in stocks and bonds that are accessible to anybody and everybody without the added administrative costs an insurer has to pay.
If you think someone will be dependent on your support for your entire life and after you die -- a disabled child, for example -- permanent life insurance could be a consideration if other means to achieve this end (an ABLE account, for example) are insufficient. For most people, we would start the life insurance conversation by understanding why the risk exists (Do you have young children? Do you share a financial obligation with someone?) and what alternatives could address that risk (Would your retirement savings be sufficient to support your heirs?). If there's a significant risk, try to mitigate it yourself. If that's not possible, transfer it to an insurance company. If you're looking to grow your savings, there's nearly always a better alternative than what's available through a life insurer.