In our capitalist economy, it is assumed you are going to spend your working-life saving or investing, or otherwise accumulating “wealth” before you quit working or die. It is assumed you will accumulate enough of the wealth-stuff to become secure–so secure that you won’t need life insurance anymore.
Did you know that?
Let me back up and explain.
I was 53 yrs old before a financial planner actually explained insurance to me in this light, but by then it was too late. Lord knows insurance agents never said so clearly. I had already spent thousands for life, AD&D and Disability Income policies in my early working years. I needlessly spent thousands out of fear (or at least “high anxiety” of the Mel Brooks order). And guess what? The financial planner sold me some more life insurance!
So it recently came to pass, as I was sorting through my remaining policies, that noticed their expiration dates. I realized before my son graduates from college, I will have no significant life insurance coverage unless I “convert” them to some unknown fixed price policy. Although I haven’t asked an insurance agent about it, I suspect the conversion I will be able to afford will be nothing more than a burial policy of between $3,000 and $5,000. I also realized this: sometime between now and then, I am going to have to explain life insurance to my son. When I do, I want to relieve him of the “high anxiety” issues he might unconsciously be inheriting from me in the same way I inherited them from my parents. Trouble is: that might be hard to do.
So here is how I intend to explain life insurance to my son.
There is an old adage says: “When you buy life insurance, you’re betting the insurance company you are going to die before they get all your money, but they are betting you’ll live.” You have fear (“high anxiety”). They have actuaries–odds makers. Their actuarial tables represent the odds of The House winning the bet. They are pretty sure they will win most of the time, or at least enough of the time to keep their companies afloat and pay off whatever they agreed to if you should die prematurely, at least according to their tables.
Their actuarial theory is that your life is like a bell-curve. When you are young, you don’t have much, but you don’t need as much either, so your obligations are low. You get older, get married, get a house and kids–you get into your prime earning period and you fear your death or disability would seriously leave your dependents strapped with long term mortgage payments, no money for college, etc., so you run out and buy bigger insurance coverage. Toward the end of your life, the theory continues, your kids go out on their own, the house is paid for, you start spending your savings, your IRA money, living off investments—who needs insurance then, right?
But if you are convinced you will not complete the full ride on the curve, you may have a willingness to choose policies with higher benefits and higher premiums—and live to make all the payments! Insurance companies can stack the odds in their favor by increasing your fear-factor and prompt higher payments for bigger or more elaborate coverage.
All-in-all, it is a wonderful theory but I think it is predicated on undependable premises given the modern age of the 1% vs the 99%. The 99% do not accumulate wealth simply because they can’t. And that, dear friend, is why insurance has become so perplexing because it more-and-more resembles how my parents viewed the world through the lens of the Great Depression.
My father and mother came from a generation that did not–could not–think this way. They came up in the Great Depression, so everyone from millionaires to mineworkers suddenly found themselves with absolutely nothing as a result of failed capitalism. And in a time of despair, they could not envision a future that might be any better. Sure they hoped it would get better and eventually it did; however, they were knocked off-balance hard enough never to fully recover–at least my parents were. They came to see insurance as a legacy (a “just-in-case it happens again” cushion) for their kids. More–they thought of it as an obligation. And we kids grew up thinking that way too. The hazard is conceiving of life insurance as a legacy, a gift, or inheritance. Insurance companies love to sell it to you with that gloss and shine, but their actuaries still don’t rate your fears as highly.
From this simple premise have come a myriad of slick life insurance policies weighted in favor of the insurance company. Term Life, Universal Life, Whole Life policies–annuities, premiums, “surrendering” your policy, “converting” your policy, “exclusions”, “annuities”—all the jargon that goes with insurance is really confusing and intimidating. But the final analysis is the same: they have designed policies which minimize their risk of losing money on the bet you will die before they think you will, and maximizing the amount of money you will pay over term of the policy.
So you have to ask yourself: why am I buying life insurance anyway?
Well, mainly it is out of fear. You fear your loved ones will be without some money if you die, and the more they depend on you, the more you have a responsibility to provide a cushion at your death. “Burial policies” are a kind of minimum—policies that basically pay the undertaker to put your rotting corpse decently into the ground or an urn. And they are “cheap” as insurance policies go. About the rest of them, I am not so sure. I do know that it is harder to accumulate “wealth” in an era when wages have not kept up with inflation and jobs are scarce, and becoming scarcer. I do know the cost of education and health care are going up. And I know your social security is not going to be as generous as your father’s . Who knows? Maybe your father’s high anxiety was just ahead of its time.