Life Insurance and Early Death

Social Security has a benefit that many people don’t seem to know about. If you are contributing to Social Security and you die and have dependents they are entitled to benefits. You can find more detail of how much those benefits are here at the Social Security website. Like most things it is based on how much you have paid into SS.
Here is probably the most important information to know from talking with friends.

  • Your widow or widower who has not remarried can receive survivor’s benefits at any age if they take care of your child who is under age 16 or is disabled and receives benefits on your record.

Here is a picture from my SS website page of the benefits my wife or children would get.

The reason I am mentioning this is that I have had discussions with at least 2 friends lately about life insurance. Both expressed interest in life insurance because they were having children, or more children and were concerned about their wives being financially stable if they were to die unexpectedly. I think it is great that both of my friends are thinking about their wives futures. That shows a great husband.

Life insurance is something you pay into each month or year and if you die they pay your beneficiaries a lump sum, between $50,00 and $1 million depending on how much you pay each month. There are 2 ways to structure/pay for life insurance.
One friend was considering term life insurance. This is good and cheap insurance! This is life insurance that only covers you for a term of your life, measured in years, 10, 20, 30 years. You pay an insurance company each month, say $50-$200. If you reach the end of the term and you haven’t died, they get to keep all your money but you have not paid a lot in and you can stop paying. Hopefully by that time there is no one who wouldn’t be cared for if you died. Or, they would be able to live of the Social Security money as well as the investments you have accumulated by that time.

Alternatively, the other friend was considering whole life insurance. This is bad and expensive insurance. This insurance can cost $800/month or more! It will have the same payout ($100,000  up to $1 million + depending on how much you pay in). But it will likely have a monthly rate of 10x the term life insurance, or more! This money is then invested by the whole life insurance company in the stock market in the same investments you could invest in yourself. They keep some of the returns and they give you some of the returns as opposed to you getting all the returns if you invested yourself.. Eventually (after 20 or 30 years) the money that your money gains will be able to completely pay for your monthly premium. Whenever you die this money will be paid out to beneficiaries. You can also cash out a whole life policy after a certain amount of time and many whole life policyholders do eventually cash it out before they die because it is such a bad (money losing for policy holder) plan.

Let’s say you pay $100/month for 20 years to a term life policy. That’s a total of $24,000. And you will end up with $0 at the end of 20 years.

But look at whole life insurance, you pay $800//month for 20 years that’s $192,000. Your policy is likely not even worth that much to cash out at that time, or worth only a little more than that.

With the $700 a month you saved with the term life insurance you could have invested that money in a 401k, IRA or a normal brokerage account. That money would have grown much faster than the money you would have paid to the whole life insurance people.

You can get more precise numbers from this website where they have done similar comparisons.

My belief is there is already most of the knowledge we need available we just need to connect people to the knowledge they need. Hence I was not going to do all the calculations over again when someone has already done them for you and me. My goal is to make you aware of the benefits of Social Security for early unexpected death and point you to the calculations others have done countless times to show that term insurance in conjunction with investment of the saved money over whole life is a much better way to use your money than whole life insurance. I suspect and hope that in my lifetime whole life insurance will not be offered anymore because no one will want to buy it because it is such a bad deal for consumers.

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