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Life Insurance: Who Needs It?

This article was written by in Insurance. 13 comments.


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Having worked for an insurance company in the past, I may be more critical of the industry than most. Don’t get me wrong. It’s very important to have different types of insurance. When I was in a minor car accident — nobody was hurt — I was certainly happy I had insurance. The same was true a few years ago when a thief broke into my car and grabbed my radio and some other items. Insurance is both a service and a product, and by paying the premiums, customers are guaranteed some form of protection.

I can’t get away from the fact, however, that insurance companies make more money when they don’t pay out claims — when they don’t perform the service they’re supposed to perform for their customers. I wrote about this recently when comparing mutual insurance companies and public insurance companies. Shareholders’ needs for profit don’t always play nicely in the short term with the customers’ needs for service.

Life saverAs if on cue, the media offered two interesting examples of insurance companies aren’t always concerned about helping policyholders. The first was fun.

Among my friends, it’s no surprise I’m a fan of the television show Leverage. The premise of the program is that five former con-men (and con-women) joined forces to protect and avenge the powerless individual against corporations, governments, and other powerful entities that have wronged individuals or the public. An insurance company was a key piece of the most recent episode; the company collected premiums and hoarded the cash, never paying claims. In reality, of course, a company would be required to pay a certain amount of claims or return the premiums, or else face a fine, but in the world of Leverage, that’s a minor detail that can be painted out of the story. Clever writers, when asked, can easily get around such seemingly troublesome plot holes.

The other example is not so fun. Progressive Insurance held the policy for a driver who recently died in a car accident. The other driver, who may have been at fault for running a red light, was underinsured. The insurance company representing the driver at fault figured it was a clear case, and paid benefits, but since the other party was underinsured, the payments did not amount to much. The driver who died carried coverage for underinsured drivers, so her own insurance policy from Progressive should have covered the gap between the benefits provided and what the driver’s estate should have received.

Progressive refused to pay, and in court, a lawyer from Progressive defended the driver who was at fault, then denied that they defended the driver, then sent social media spam to anyone who questioned Progressive’s actions. As far as I know, the company has neither apologized for their behavior or marketing lies, nor have they paid the underinsurance claim to the estate of the deceased driver.

Update: You can read more details about the Progressive Insurance case from an article by Ron Lieber in the New York Times.

But I didn’t come here today to complain about insurance companies. (It’s just so hard not to, though, so please forgive me.) Today’s is a day to celebrate life insurance, so I’m going to share my thoughts about that instead.

Financial planners say life insurance is an essential part of growing an protecting a family’s wealth. But I don’t carry any life insurance. The purpose of life insurance is to pay benefits to those who count on your income-earning ability or human capital in order to live — or in order to live the type of life to which they are accustomed. If a wife and three children were depending on my earning a six-figure salary each year, it would be a shock for them if I were to suddenly pass away.

I don’t have a family counting on my generation of income. I don’t even have a salary — though I am earning income as a freelancer and consultant. Not only that, but I have enough assets — at the moment, anyway — to cover the cost of the expenses relating to my own hypothetical death, so that’s not something that needs to be covered in the form of insurance. Life insurance will also be used to cover debts, and at this time I have none other than credit card debt I pay off every month.

Put succinctly, I don’t have life insurance right now because I don’t need it. It’s only a secondary benefit that I get to continue avoiding working with yet another insurance company.

I may be in the minority. Most Consumerism Commentary readers have dependents. The me of the future might also have a family who at least partially depends on my income. Those who do have concerns other than their own prosperity need to consider an option for ensuring a level of continuity following an unfortunate event like death. If you’ve managed to build a significant amount of wealth, you can effectively self-insure. With ten million dollars in the bank, it might be possible for your survivors to live their lives without much change from a financial perspective. With no million dollars, however, like most households, buying life insurance is a wise choice.

How much life insurance do you need and how much does it cost?

There are a large number of calculators online designed to tell you how much insurance coverage you need. The total amount of coverage depends on how much income your survivors would need, how long your survivors would need that coverage to continue, some specific large expenses that would need to be covered like college education for your children or charitable donations you’d like to leave, and how much of your own assets you’d be willing to commit to these same purposes.

Some of the calculators are linked directly to insurance agents. Good luck getting information on the cost of insurance without leaving your name and contact information. In order to receive quotes pertaining to the cost of premiums, for the most part you’re going to need to open yourself up to calls or emails from salespeople. In general, the younger you are, the less you’ll pay as a premium for the same coverage. It’s not ageism, it’s based on probability tables. Insurance companies project life expectancy based on age, and use that information to calculate the chance of one policyholder being able to cover the expense of his or her own coverage.

In some cases, the company will underestimate your life expectancy, and in other cases, the company will overestimate. The amount of money spent on premiums in total should be able to cover everyone while providing profit to the insurance company. There’s not a big chance of these calculations going horribly wrong. It’s not like property and casualty insurance, where an uncharacteristic storm could send an insurance company into bankruptcy due to its inability to pay its claims. (But that’s why re-insurance exists, and that’s a whole other topic.)

Anything that could potentially effect you’re life expectancy will adjust the cost of your life insurance premiums. If you engage in unhealthy activities, if you like extreme sports involving risking your life, or if you have a chronic illness, you’ll find it difficult to negotiate a bargain for yourself, if you can qualify for coverage at all.

The type of insurance also effects the cost. Different types of insurance do different things. Most experts — those who aren’t trying to sell insurance, anyway — tend to agree that the best type of insurance is the type that keeps it simple: term life insurance. Once you start looking to universal life insurance or cash value life insurance, where part of the insurance policy is an investment or savings vehicle, the costs generally don’t balance the type of service you’ll receive. You’re better off keeping your investments separate from your insurance, giving you a better chance of controlling fees and expenses. Why? Because reducing your investment fees and expenses is one of the best ways to improve the performance of your investments over time.

And don’t forget to shop around.

Insure.com, Consumerism Commentary’s sister site, answers commonly-asked questions about life insurance here.

Do you have life insurance? Why or why not? If you do have life insurance, what type do you have? What have been your experiences shopping for life insurance?

Read more about life insurance today from over 100 bloggers and other writers by following today’s life insurance movement.

Photo: Phil Comeau

Updated August 24, 2012 and originally published August 22, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar Tom Murin

Flexo, I don’t think you have a handle on the Progressive case and more generally how underinsured motorist coverage works. From what I read, fault was not clear. The other insurance company didn’t figure it was clear – they paid because their policy limits were low and the death of the other driver. A business decision. Because of disputed liability Progressive didn’t pay. This is because they didn’t think it was legally owed. If their policyholder was at fault they weren’t entitled to collect (and would have actually gotten a windfall from the settlement from the other driver). In these cases, they stand in the shoes of the alleged at-fault party, but they don’t actually defend them. It is adversarial. The trial determined that the other driver was at-fault and Progressive now has to pay. If Progressive thought the other driver was at-fault they could have paid this without the trial. In hindsight, they wish they would have paid this. Of course, if they won the case – we wouldn’t be having this discussion. In summary, this is not a case of an evil insurance company not paying something that is clearly owed under the policy. This was a disputed claim that went through the process for resolving it. (disclaimer: I worked for Progressive about 15 years ago.)

Otherwise, life insurance is a very good think. My mom died when I was in college and thanks to her having adequate coverage my siblings and I were able to finish college and keep the family home. My mother was an insurance agent, and clearly knew the value of life insurance.

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avatar Luke Landes ♦127,435 (Platinum)

Tom,

Thanks for sharing that. It’s interesting to see the case from the insurance company’s perspective.

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avatar SteveDH

Being retired, I have also given up life insurance as a part of my financial planning. With my pensions providing survivor benefits to my wife in the case of my demise the need for protecting income is gone. Both of my pensions could continue to pay her 75% of what they pay now and Social Security will insure she gets at least the value of my social security benefits. When younger we went the term-life route to replace lost earnings/assets and never got involved in the “life insurance-as-saving” side of the equation.

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avatar juggler314

I pretty much feel this way too. I do have an expensive highly leveraged house though and a SO that will likely continue long term. For that reason I am considering some form of life insurance. I would like to think that if either of us passed the other would have it fairly easy (o at least debt free). Also there is the question of age. I am pushing 40 now and premiums will start to escalate, it could ,make more sense to pick it up now rather than later for that reason alone.

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avatar gina

You can also get life insurance as an income stream, so you don’t have to worry about market fluctuations

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avatar Daisy@EverythingFinance

I have life insurance with the company for which I work, but that’s it. I don’t have children yet so don’t see the value in being covered even more. If I died, my work would provide a fairly large sum to my common law partner with which he would be able to live for at least 4 years without working.

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avatar Luke Landes ♦127,435 (Platinum)

I your life insurance plan with your work portable? If you lose your job, I’d hate for you to lose the coverage you’ve purchased through you premiums.

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avatar Apex

Getting a quote on term life insurance is very easy with no contact to a sales person.

There is a site called http://term4sale.com/

You put in your location, age, general health condition and type of term you want and it spits back dozens of going rates from some of the most highly used insurance companies.

When I purchased a 20 year, 750K policy 8 years ago this site spit out the exact premium cost to the penny of what I paid for the policy and company who wrote my policy which I purchased via an insurance broker.

Anyone wanting an idea of what insurance would cost them should check out this site. I check the site for updates on premiums in case I would want to take out a different policy regularly. I don’t know how they make money and I have no affiliation with the site.

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avatar eric ♦1,549 (Half-Dollar)

Thanks Apex. Good website to reference!

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avatar Lance @ Money Life and More

As you read on my blog today, I don’t have it right now and don’t need it right now. If I ever do have a kid I will buy it though.

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avatar Cejay ♦1,521 (Half-Dollar)

I have life insurance bough through my company at pennies. Since our house is paid for , we have no other debts and have no children or obligations we really have no need for much insurnace. We mainly have the coverage we have since it is very cheap and we will have it in case we need to take a sabbatical or something similar.

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avatar Carrie Smith

I’ve always tried to use my own judgement when buying any type of insurance from insurance companies. It’s best for each of us to do the research (with some guidance if necessary) and come up with the best solution for our situation. I too am single with no dependents, am completely debt free and have a few assets to my name. I’m not rich by any means, but I do have a small amount of insurance coverage through my employer (since I don’t have to pay for it) which will cover any funeral and burial expenses. I would also like to leave my siblings and nieces/nephews with a little money when I’m gone. But that’s just a personal thing.

For the most part I agree with your points. Insurance companies, like in Progressive’s case, don’t always have the interest of the insured consumer at heart. Three years ago, I was in a major car accident that totaled all 3 cars. The driver ran a stop light and crashed into a car, that spun into my lane and crashed into me. As luck would have it, they weren’t insured and I had to pay for everything. Shortly afterwards my premiums went up (even though I was not at fault) only because I had to claim the incident. I shopped around for a new company after that.

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avatar qixx ♦1,880 (Half-Dollar)

I have life insurance through work. It is not portable and will go away when i leave my current employer. i know this and include it in my negotiation package. Other than that i have no other coverage. When i can’t get it or between jobs i don’t carry life insurance. I am not one to gamble against myself.

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