Don’t rely on life insurance from employment
Term life is pure life insurance and the only one needed for most people.
Term life has fixed payments and fixed payout. Avoid other life insurances!
Life insurance from your employer is nice but can backfire when you need it.
Aside from amount and term, your age and health are the primary determinants of price.
Karl Marx would approve of term life insurance which, in its purest form transfers money from large groups and moves it to the few that suffer a rare financial catastrophe. The idea may have been around as early as ancient Babylonia and medieval guilds would reimburse a member who suffered financially with group funds. It transfers from those who do not suffer to those who do -- a formula of which Mr. Marx would surely approve.
Long before Marx, the first known commercial life insurance product was sold in 1583 England. It failed horribly because the industry lacked the necessary knowledge of actuarial (risk) science and advanced statistics. It was essentially gambling, which attracted legal and religious scorn. English financiers developed statistical models in the following centuries and the first legal preconditions for an insurance industry were established in the English Gambling Act of 1774.
The first (unregulated) U.S. life insurance company was the Presbyterian Ministers Fund in 1759 Philadelphia. Today there are 737 life insurance companies in the U.S. with a trillion dollars a year revenue. That’s roughly the size of pharmaceutical or energy industries.
Much of that trillion is unnecessarily complex (i.e., not “pure”) life insurance that is sold to people that don’t really need it or understand it. Wall Street loves to package complexity in ways that sound great but doesn’t quite deliver. These impure products sew together life insurance with a (typically) lousy investment account and go by names like universal, variable, indexed or cash value.
They are big money makers for the insurance industry and the agents that sell them. On a $500,000 universal life policy an agent will make about 6% or $30,000 – quite an incentive. Buy these with great skepticism. I have yet to find a client plan that benefits from one, and I know several that wish they hadn’t purchased one.
Fortunately, there is an angel among the fallen. Term life insurance is pure life insurance. There is no investment component. You pay a flat monthly amount for a pre-determined term like 20 years and if you die before the end of the term a named beneficiary receives a monetary death benefit. Term life insurance has a commission, but much less, usually less than $1k for the families I serve.
Life insurance from work is good to have, but it’s usually not enough and you can unexpectedly lose eligibility. What do you do if you are laid off or between jobs? Degenerative disease or cancer often forces an employee to separate from employment before death, losing the benefit. Policies are sometimes portable, but you shouldn’t rely on that. They are also sometimes taxed, which a private individual policy is not.
Please, get the amount you need from a private individual policy and let the employer-provided plan be additional. Next week, I’ll follow up with specifics about the amount, the process, and some resources.
