Most everyone knows the primary purpose of life insurance; to replace an income or to eliminate debt. Congress deemed that purpose to be of such importance that they exempted life insurance proceeds from taxation. The logical conclusion is that if there is no income that needs replacing and no debt that needs eliminating, then life insurance is not needed. But let’s take a closer look.
Most types of insurance are obtained to indemnify us against an event that could be catastrophic to our financial well-being. A large settlement because our dog bit a neighbor’s kid, open heart surgery, or our house burning down are economic events that would financially ruin most people, absent insurance, which is precisely why people carry insurance for such potential events.
But what such events didn’t mean financial ruin? Would a person worth, say, $25 million need insurance for such contingencies? Since it’s very unlikely that any jury would return a multi-million dollar verdict for a dog bite or an operation would cost even half that amount, should he carry insurance to protect against such potential events? Would you?
I would be willing to bet that such a person would carry insurance to cover such contingencies. Why? Two reasons, really. First, things that have value are candidates to be insured. Second, the premium for policies that cover such events are miniscule compared to the potential payout.
So that leads to the question of whether that same person worth $25 million should carry life insurance. A critical point would be his age and occupation, so let’s say he is 55 and made his money as a hedge fund manager. Let’s further state that estate taxes are not an issue. He’s leaving his kids the estate tax exemption and the balance to his favorite charity.
Should this person carry life insurance? Although the case can be made that he shouldn’t, I submit that he should, for the same two reasons listed above; his life still has value, and the premium is miniscule compared to the potential payout.
The argument against life insurance is usually that someone in that position could do better by investing the premiums. Two answers to that. First, only if he lived long enough. There wouldn’t be enough time to beat the return on a life insurance policy were he to die much before life expectancy. Second, it is inconsistent to insure his valuables but not his life (which is more valuable than his things).
The other common argument is that he doesn’t need the life insurance. That is absolutely true, he doesn’t need it, but then he doesn’t need to insure his house and his car either. The fact remains that his life has value and value should be insured when it makes economic sense.
So yes, the primary
purpose of life insurance is to make sure that one’s dependents are not left
holding the bag. But even after the
dependents are provided for, if one does not insure one’s life for its economic
value, isn’t it a statement as to his opinion of the value of his life?