The reason that life insurance, or any insurance, really, exists is because the future is unknown. On second thought, even if we could foretell the future, we might still need life insurance if that future showed that we weren’t in it.
A prospect recently expressed to me that while my proposal made sense, he was concerned that he might not need the insurance in the future. When I asked him to clarify that, he said that if things went the way he planned, he would be in a financial position where he wouldn’t need the life insurance I was proposing.
The key phrase there is “the way he planned.” Of course if everything goes as planned, we will be financially successful. Nobody plans to fail. But as the saying goes, shit happens. Layoffs, divorce, medical issues, family problems and premature death can derail the best laid plans.
So if there is an early death, no one will question the purchase of life insurance. The problem is that an early death is an anomaly. If it wasn’t, the insurance would be unaffordable.
The life expectancy of a 30 year-old male is almost 50 years, so let’s suppose my prospect has everything break right for him. No employment interruptions, no divorce, no medical issues etc., He makes it to retirement independently wealthy and doesn’t need the life insurance he bought at age 30.
Is that really a problem? There are many things he could do with the policy, such as giving it to his favorite charity (for which he would receive a tax deduction equal to the interpolated terminal reserve of the policy) or naming the charity as the beneficiary. He could also surrender it for its cash value.
Now let’s say things don’t go quite as well. Now he’s not destitute, but perhaps a divorce, a second marriage, and being downsized at age 55 has left him a little more dependent on social security than he had planned.
In this case, the policy could indeed come in handy. Should he predecease his spouse, she could definitely use the infusion of cash, as her income will decrease by the smaller of his or her social security check. Should she predecease him, he could turn the policy into an income stream.
The point is, at age 30, we don’t know how things will turn out. If things turn out great, there are always alternatives regarding the policy. If things don’t turn out quite so well, it will be a comfort to have the policy. In summary, the old adage about parachutes applies to life insurance: it’s better to have it and not need it than need it and not have it.