Life Insurance, Without the Sales Pitch

Life insurance is among the most effective ways an ordinary family transfers meaningful money to the next generation, and it is sold so aggressively and so confusingly that people either buy the wrong product or avoid the subject entirely.

Here is the whole thing without a pitch attached.

Term. You pay a premium for a set number of years, say 20 or 30. If you die during that period the policy pays your beneficiaries. If you do not, it ends and nothing is paid. Because of that, it is inexpensive, often strikingly so for somebody young and healthy.

Whole life, and its relatives universal and indexed universal life. Coverage that lasts your whole life combined with a savings or investment component that builds cash value. It costs several times more than term for the same death benefit.

For most families, term. The reasoning is simple: you need coverage during the years when other people depend on your income. Children at home. A mortgage. A spouse who could not carry the household alone.

By the time a 25 or 30 year term ends, the children are grown and the mortgage is smaller. The need has shrunk because you spent those decades building.

The common advice is buy term and invest the difference, and it holds up as long as you actually invest the difference. Which is what the retirement article is for.

Whole life has legitimate uses, mostly in estate planning for large estates and in specific business situations. It is sold far more widely than those situations occur, because the commission is much larger.

“Term covers the years people need you. Whole life covers the salesman's decade.”

Common rules of thumb run to ten to twelve times annual income, but the useful way is to add it up: what is left on the mortgage, what it would cost to raise and educate the children, final expenses, and enough that a surviving partner is not forced to sell the house in a bad year.

Then check what you already have. Employer coverage is usually one or two times salary, which is not close to enough, and it ends when the job does. Treat it as a bonus rather than a plan.

Name a beneficiary, and a contingent beneficiary in case the first person dies first. Keep it current after a marriage, divorce or death.

This matters more than almost anything else here, because a beneficiary designation overrides a will. A policy naming somebody you have not spoken to in fifteen years pays that person, regardless of intent.

And tell your family the policy exists and where the paperwork is. Unclaimed life insurance benefits are a real and sizeable category, made entirely of policies nobody knew about.