Today's topic is The Theory of Decreasing Responsibility. In my debates with my insurance friends the topic of insurance being a permanent or temporary need typically comes up. I will include an argument for both sides, and then follow up with my analysis.
As you can see from the videos, the basic argument for whole life insurance is that as you age insurance becomes more expensive. When your 10, 20, or 30 year term comes to an end, you will have to pay more to renew it again. At some point you may not be able to afford the policy at all. An additional point is that when you try to apply for a new policy at an older age to get a lower rate (many policies are guaranteed renewable but with a higher rate than a new policy would cost), you may have become uninsurable due to health issues since you first applied. The proposed solution is to pay a higher initial premium than you would with a term policy, to gain the benefit of a fixed premium and coverage throughout your entire life (the video refers to this as "peace of mind").
The counterargument to this is that the purpose of life insurance is to provide a big pile of cash for your family in the event that you pass away before you develop a big pile of your own. As we've discussed in previous posts, a typical family needs anywhere from $300,000 to $800,000 or more worth of insurance to meet all final expenses, debt obligations, and provide a lump sum of cash to invest so that the family can use the money to meet its daily expenses after losing the breadwinner's income.
Over time, assuming the family's need was originally $400,000, but its assets/investments now totalled more than $200,000, then the shortfall between what it has and what it needs will have been greatly decreased. Additionally, most of the family's income in the early years is used to pay for liabilities (car loan, mortgage, children, etc.). If the children are at some point gone, and so are the mortgage and car loan, then the need for insurance becomes even further reduced (as does your premium).
The counterargument to this is that the purpose of life insurance is to provide a big pile of cash for your family in the event that you pass away before you develop a big pile of your own. As we've discussed in previous posts, a typical family needs anywhere from $300,000 to $800,000 or more worth of insurance to meet all final expenses, debt obligations, and provide a lump sum of cash to invest so that the family can use the money to meet its daily expenses after losing the breadwinner's income.
Over time, assuming the family's need was originally $400,000, but its assets/investments now totalled more than $200,000, then the shortfall between what it has and what it needs will have been greatly decreased. Additionally, most of the family's income in the early years is used to pay for liabilities (car loan, mortgage, children, etc.). If the children are at some point gone, and so are the mortgage and car loan, then the need for insurance becomes even further reduced (as does your premium).
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