Does the Term Life Insurance make sense?

 

Prior to the 1960’s the whole idea of term life was not very popular. In fact, it was so unpopular the very few people have heard of the “term life”. The whole concept seemed shaky. The traditional idea of life insurance was similar to bank accounts. Basically, you would keep putting in money into a policy which you can borrow against and which can invest money on your part. In other words, it was an asset that you built up through the years. If you died, not only do you get a certain fixed amount, but you’ll also get a certain percentage of the money that you have built up.

 

Life insurance has historically been positioned much less as a shared risk as more of an investment asset. It’s so much different from stock portfolios. The key point of differentiation is that insurance companies would often buy huge amount of real estate mostly being commercial in nature and rent out this property.

 

Using this formula, insurance companies became really rich since people only cash out when they died. They have access to this huge amount of money which they used to buy real estate. The real estate in turn would generate income from rents. In many cases, the insurance companies would buy real estate on using a loan and develop it into a commercial building and office space which ends up paying for itself. This was like shooting fish in a barrel. This was a “can’t lose” situation.

 

There is however one downside. Most people cannot afford this type of insurance because it costs a lot of money. Since you are building up an asset and you’re putting a lot of cash year after year, you can well imagine that this can take quite a big chunk out of your annual income. Most people have kids to raise. Most people have to put food on the table. Most people have lots of expenses and if you factor in the need for insurance, most people would automatically think that this is completely optional. It’s great and everything. They can understand the value but it’s definitely not at the top of their priority list.

 

This was the name of the game until the 1960’s. In the 1960’s, term life insurance became really popular. With term life Insurance, you are guaranteed a certain fix amount if your family is guaranteed to collect a certain fix amount if you die within a certain. This is usually offered on a year to year basis. In a way, it’s a bet against the insurance company.

 

The insurance companies are betting that you’re not going to die that year. You on the other hand, whether you like or not and whether it sounds good to you or not, are betting that you will. If you don’t die that year, the insurance company keeps your money and then the bet renews for the next year to pay your premium. This goes on and on and on until of course you die. This model enabled insurance companies to drastically reduce the amount of premiums had to pay. Basically, they would get a huge pool of people putting in their bets year after year and only certain percentage of those individual would actually die. What happens to the rest of the money? Well, it goes to the insurance company.

 

Properly executed, this term life insurance model actually created more cash for insurance companies especially if they’re going to reinvest all that cash on real estate and other investments.  For consumers on the other hand, term life insurance makes sense if they’re older or if they have reached the age that they know that they’re susceptible to certain fatal conditions.

 

Outside of that, it would still be a good idea if you negotiate the lowest prices possible. If you can get the lowest premiums possible, then it would make a lot of sense. But if outside of that, this might be an issue. You probably would be better off with regular or traditional insurance packages.

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