I'm trying to understand the product and I only have the examples of one family member to go by. What you get from internet browsing is predominantly marketing copy from large companies, if exclusively that.
Why do people purchase Life Insurance? Why is it the most effective product for that purpose?
Thank you.
If you have dependents that rely on you financially, you buy life insurance so as to not disrupt their life if you were to die. You have a spouse who would have to pay the mortgage and probably couldn't on a single or no remaining income. You have kids who need to eat and go to school.
It's the most effective product for that because you can rollup the net present value of many years of future income for just a couple basis points a year. Speaking to term life insurance.
Separately there are different estate planning issues if you're later in life, but generally the purpose of life insurance is not leaving your dependents in financial ruin if you pass.
There is only ONE legitimate reason to purchase life insurance - to protect your family from the loss of your income should you die unexpectedly. No other considerations should factor in.
The most effective product for that purpose is simple Term Life.
Dying is expensive. Really. Not just because you lose the source of income this person was providing. But you have to pay for the funeral, burial, estate taxes, therapy, mourning period without working.
We normally insure things that are rare, but devastating if they happen.
As a parent, if you die, you'll be sending your kid with a lump sum under his arm to be adopted, maybe by a relative. That eases the tension on them.
If you have a life insurance as a partner in your business, you'll making sure that if one partner dies, the other will be able to buy the business.
Life insurance for your kids is meaningful, because some companies allow the kid to withdraw what was paid into it when the kid is in his twenties.
There are certain things that money can't buy. Love and affection are among those. But there are monetary investments that get you closer to non-quantifiable objectives. I believe a life insurance is one of those.
Life insurance according to me is targeted at a deep psychological need. Mental peace results from the feeling that you have secured (to some extent) the future of your loved and dependent ones. Life insurance products try to address this deep motivation.
Having said the above points, marketing messages merely help one choose between several options. You cannot force a buyer to invest in a life insurance. Rather, when someone is already sold on the idea of a life insurance, the commercials try to attack the rational mind. Some common benefits stated are tax benefits, bundling of other benefits like fixed income, medical cover, etc.
Last but not the least, some invest in insurance just for tax purposes. But ideally, that should not be the true objective. There will be better ways.
This is likely to get heavily downvoted, but here goes:
If you are not financially disciplined enough to actually save money at this point in your life, buying a whole life policy forces you to do just that. Yes, it is an "investment" that you have absolutely no real control over. Yes, it is more expensive than many alternative means to accomplish the task of saving money. By the time you learn a bit you likely have already paid yourself through the highest cost years of that policy, from an investment standpoint.
However, once you pay through the high cost years with no return the compound interest can far exceed what you would have otherwise been able to save and invest as an ignorant investor, not to mention the fact that insurance companies are definitely very careful of spending money. They may not pick the absolute hottest stocks but they are much less likely than an ignorant investor to lose money.
By saying this I'm not putting someone outside of the financial marketplace down. I wholeheartedly admit that I am an ignorant investor. I have neither the time nor the interest in keeping absolutely current on the financial marketplace. I would rather put money somewhere and let it do its thing than actively manage a portfolio. I am gaining much more than I am paying in the cash value of my whole life policy at this moment, and it is money I can tap into as needed without tax penalties.
