Life Insurance

A long time ago for a very short time I was an insurance salesman. On the positive side, my sales always stayed ahead of my draw. I even received a few paychecks after quitting. In those few months I learned I am not a salesman. I don’t have a salesman’s bone in my body. In fact, if anything, I am the anti-salesman. When salesmen have to deal with me they run screaming into the night. During those days, insurance salesmen had a saying, “Sell term, don’t eat. Sell whole life, don’t sleep.” The meaning of this saying is rooted in the company’s commission structure. If a product is better for the corporation than it is for the client it will invariably pay a higher commission. A salesman with the best interest of his clients in his heart would be a very hungry salesman.

I have not made a study of the insurance industry as I have topics like value investing so I am not claiming to be an expert. However, I do have an opinion based on personal experience and readings from other personal finance teachers. Given that caveat, I believe there is only one reason to carry life insurance, minor children. If you have minor children, carrying life insurance is a part of being a responsible parent. Whole life is a waste of money. Term life gives the most coverage for the least money. Remember, you are buying insurance here not some sort of a second rate disguised investment program. There are far better things you can do with your investment dollars, than buy an insurance salesman a new vacation home.

How much? The number I have heard is $250,000 per minor child on the life of the primary breadwinner. The secondary income/homemaker should also carry some insurance, but much less, perhaps enough to pay for daycare and some other services in his/her absence. Personally, I like the idea of level term for a period of twenty years. That is about how long your children ought to be hanging around your house. However, in these days of the boomerang child and education creep that seems to require a Master’s degree for a good job, perhaps you ought to consider 30 year term. Again, personally, I like the idea of a fixed premium rather than a premium that increases over the life of the policy. I would suggest making the buy before the birth of your first child. I would consider buying enough for the number of children you plan to have rather than just that first child. You will get a better rate at a younger age. Also, buying more insurance at one time will give you a better rate than buying separate policies.

The Internet has greatly facilitated the purchase of products like term insurance. You no longer are faced with the prospect of an invasion of your home by a series of commission salesmen in order to get a few quotes on a term life policy. You can now collect all that information in the privacy of your own home. This would include the financial viability of the insurance company. You don’t want to buy a policy from the Texas Terror Insurance Company with a Standard and Poor’s rating of D.

In the interest of openness, let me state that I have no children but I carry term insurance offered by my employer in an amount roughly equal to my annual salary. When I first started work over 26 years ago, we had a net worth of about $2,000. I thought it would be nice to give my wife a year to get her head together, if I unexpectedly died. The insurance is inexpensive, really an employee benefit, so I have never cancelled the policy. When I retire, the rate will take a big jump, so I will not elect to continue that coverage.