The concept of insurance likely predates written history. Ancient agrarian societies would pool the risk of crop failure by maintaining ledgers spanning multiple growing seasons. If Ug’s crop failed this year but Zog’s was good, Zog would extend a ‘loan’ to Ug. Ug would then return the favor when the tables turned. An informal, imperfect solution that worked for millennia.
Archeologists have even uncovered evidence of insurance in the form of burial societies throughout the Roman empire and 1st century Egypt. We know that the Roman government would insure the lives of its soldiers, compensating the families of those who died in battle.
The first formal recorded death insurance contract was made in Royal Exchange, London in 1583, between Richard Martin (the policy owner) and William Gybbons (the insured). Mr. Martin paid 40 pounds to a group of merchants to insure the life of Mr. Gybbons, a person he depended on, if he died within one year. Gybbons did die within the coverage period, but the merchants denied the claim on the grounds of a technicality.
Mr. Martin was ultimately paid the 400 pounds but only after securing a legal victory in the Admiralty Court. Thus began the codependent relationship between consumers and an inauspicious insurance industry. A fitting start.
…the best outcome we can expect when buying insurance is to waste our money.
We all dislike buying insurance and it’s not just because insurance companies are perceived as unscrupulous. In fact, that’s a bit of an unfair stereotype. The nature of insurance is unilateral so most of the time it feels like you’re paying for nothing, and nobody likes paying for nothing. Fact is, the best outcome we can expect when buying insurance is to waste our money.
If you file an insurance claim that means some misfortune has befallen you. For obvious reasons, the moral hazard kind, insurance companies will only indemnify you in the case of a loss. You should never come out ahead. Insurance is not an investment. Say is with me, insurance is not an investment.
But, if a loss does occur and it’s a loss worth insuring such as your life, having a policy to indemnify those you care about makes a critical difference. This begs the question, what is a life worth?
There are multiple acceptable calculation methods. The most common, in order from minimal to most comprehensive (usually), being:
Capital Needs Analysis: This method calculates the amount of death benefit needed to cover immediate financial obligations upon the insured's death. It includes debts, final expenses, and income replacement for a specific period.
Income Multiplier Approach: This method calculates insurance needs by multiplying the insured's annual income by a certain factor (usually 5 to 10) to provide a lump sum that can generate an equivalent income stream for the beneficiaries.
Human Life Value Approach: This method estimates the present value of the insured's future earnings, adjusted for inflation, personal consumption, and taxes. It provides a more comprehensive view of the economic loss resulting from the insured's death.
These approaches are not just useful for telling us how much is appropriate, but also when to secure it. At some point in life, you may find yourself either economically self-contained or isolated. In other words, you have permission to die.
It’s not that nobody would care, it’s that the people you leave behind would remain financially intact if you did. In these cases, it’s generally a waste of money to fund premiums on a death insurance policy (let’s just call it what it is).
A couple situations that come to mind are retirees with fully funded retirement plans, or singles without dependents and co-signed debt. It is difficult to find a case for death insurance beyond a basic low-cost burial arrangement within these two scenarios.
Whether to maintain insurance on your life is not a simple question of age. It’s a question of circumstance. Ultimately, it comes down to who you would be leaving behind and the financial state they will be left in with you out of the picture.
There’s a special place in the hereafter for those Sons of Sam that scorch the earth before getting their ticket punched, leaving survivors in a wake of their own rubble. Don’t be that person.
You can cost effectively insure your life through individually owned term policies or employer sponsored group coverage. Many employers offer one year of your salary as basic, no-cost coverage, with the option to increase without underwriting for pennies on the dollar.
Also, don’t waste money on a policy you no longer need because you’re afraid of Murphy’s Law. Chances are, the day your obsolete insurance policy lapses is the day you get hit by the sword of Damocles. Oh well, as I said, you’re not supposed to come out ahead.
They say “never play poker with actuaries” for a reason.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.