Today I came across an older blog post about the evils of term life insurance. While this has been discussed endlessly already, the post brought up a few things I hadn’t heard before.

One of the main reasons given to avoid term life insurance was that premiums rise as you get older – for obvious reasons, someone who is 95 will have to pay close to the actual amount they’re being insured for or it won’t be worth it. It’s easy to imagine an insurance salesman striking fear in people’s hearts with this fact. But when you stop for a second you realize that in many cases getting life insurance at 95 is just about as ridiculous as getting life insurance for a newborn baby. It has one real purpose – to protect people who depend on you if you die unexpectedly and can’t earn money anymore. Hopefully most people aren’t depending on their ability to earn money for themselves from day to day at 95, let alone have other people depending on them.

Another interesting argument was that Warren Buffet himself buys permanent life insurance policies from people who want to cancel their policies in exchange for a cash payment from the insurer, and considers them a bargain even after paying more than the insurer would. Although this is used to imply that permanent life insurance is a good investment, it’s instructive to stop and think about the framing for a second. All this means is that if you buy permanent life insurance, the insurance company will offer you a payment to cancel it but it will be an amount that gives them all the advantage! This doesn’t sound like the type of arrangement where the policy holder has anything to gain.

A third reason given is for tax avoidance. If it’s true that certain types of insurance give you a way to invest with less taxes that could potentially allow you to leave more behind than if you invested the money yourself in a taxable account. The advantage this gives you depends a lot on what investments you’re offered and what fees you’re charged though. And unless you can also withdraw the money tax-free, the only way to use it yourself is to borrow against it and pay interest which is just as bad as taxes as far as I’m concerned.

Taking a small incentive for insurance and trying to turn it into a central part of your investments sounds very suspicious to me. Maybe this allows you to pay the premiums when you’re 95 out of tax-free investment growth – but you need to consider whether or not you really want to be insured when you’re 95. Not to mention the chance that you could end up in the same place as the canadian income trust investors of ’06. Where do you get insurance against that risk?

These are only a few ideas to watch out for when buying insurance. They weren’t written by someone who actually sells insurance, but it seems like there’s no end to the ways to make a potentially bad choice sound like it has no downsides. I’m sure there are some people who shouldn’t get term life insurance. It’s also true that “buy term life and invest yourself” is often brought up regardless of the context based on assumptions that probably aren’t challenged enough. But seeing things like this only reinforces my belief that the downsides to it are mostly imaginary.

What do you think? Are there any concrete reasons to get universal/whole/permanent life insurance?

Advertisements