Saving and investing will take us a long way towards financial freedom but what if, before we got there, the worst happened and we had an accident or health problem that left our dependents without income and protection? Enter life insurance. Let’s cover the cases when you might need life insurance and then how to go about choosing one.
Do I need life insurance?
The first point to clarify is that when you buy insurance, you are expected to lose money on it and that’s a feature, not a bug. If that wasn’t the case, the insurance company wouldn’t be willing to participate in this transaction. So why do it then? There are two good reasons to buy life insurance:
- Should something really bad (accident or health) happen, you or your loved ones may not be able to maintain an acceptable lifestyle, pay for education, medical expenses, etc. (note that some jobs provide life insurance to their employees, but this may not be sufficient: an increased coverage or an additional policy may be necessary).
- Someone makes the choice for you, e.g. you got a mortgage and the bank made it a requirement to cover their risk. There is not much you can do about this… Just buy the cheapest product for this purpose, and don’t be fooled by promises of additional coverage.
If I do, which one should I buy?
There are two main types of life insurance:
Term Life. Simple product that does what you would expect: pay a lump sum in case of disability or death during a certain period of time. Check price and coverage options, decide which one is good for your financial requirements and you’re done. Best case scenario you get nothing at the end of the term (and that’s good).
Whole life. Complex product that mixes an insurance policy with an investment plan. Unlike in the Term option, the investment section of the product will accumulate some value that you can access in the future (assuming the investment actually performs). But… no one will give you money for free: if that money is there, it’s because you have put it in. And, in most cases, you will pay extra for the benefit of the complex structure and the high commission of the person who sold it and explained it to you.
The simplest approach is to follow a common saying “Buy Term and invest the rest”. Get your loved ones covered with insurance and invest everything else in one of the multiple investment products out there, be it stocks, bonds, real estate, or crypto, you are very likely to end up with a bigger amount at the end than with the Whole option.
Regarding your choice of provider, caveat emptor. In such a pure financial product, it is relatively easy to make a completely rational purchase decision based on price but insurance companies have a doubtful reputation, to say the least. Some companies have been known to be experts in the art of not paying claims and have whole departments dedicated to it. Do your homework and make sure you go with a trustworthy provider that will honor its part of the deal in the future.
Keep track of it
Finally, make sure you keep your documents in a safe place and your loved ones know the policy exists and where to find it. In Exirio, we would recommend you save the policy documents in the Documents section of your account and give third-party access (permanent or emergency only) to your spouse, financial advisors and/or closest relatives.