Introduction to life insurance

- So let's talk a little bit about what's probably not your favorite subject. It's definitely not mine, and that is death. And it's not something a lot of us think about. And I remember when I was a kid and I used to see these ads on TV for life insurance, and it used to boggle my mind. I used to say, "Why would, "I don't even wanna think about life insurance, "and if I'm dead, well, you know, who cares? "You know, I won't need the money anymore. "Who are they gonna pay, et cetera?" And then I got married, I had kids, and I completely got why life insurance matters. Because once you have other people in your life that you might be helping support, then you do start to wonder, if you care about them, you wonder, "Well, what if something were to happen to me? "What if I were to die?" We would have our loss of income. They might have other things that they might have to do above and beyond that, because maybe I'm helping out at home and you're gonna need more support at home, so you're gonna have even more costs at the same time that you have loss of income. You might have a mortgage to pay, and the last thing you want your family to have to deal with if you die is not only they're hopefully grieving for you a little bit, but they're also having to move or they can't pay their house or they're gonna have to change their standard of living in a significant way. So, as soon as I had kids, I got a life insurance policy. Now, the basic idea of life insurance is you pay a premium, you pay a certain amount every year, and if you were to die, then the life insurance company will pay whoever you say is the beneficiary. It's oftentimes someone's partner or your children or some other family member, usually people that you're already helping support in some way. And when I thought about how much life insurance I needed, I remember I first got it when my first child was born, I think I was 32 years old at the time. I said, "Well, we have a mortgage." At the time we only had one kid. I want him to be able to go to college if something were to happen to me. So I got a policy that was large enough that would be able to pay off the rest of our mortgage, pay for his college education, and then maybe have a little bit extra to help my wife support her if she needed extra help with whatever it might be, and so that's how I thought about it. More recently, I got another health insurance, sorry, I got another life insurance policy with that same idea. I now have three kids. I want all of them, I wanna be able to afford for all of them to go to college. I want all of, you know, I want my wife and other folks in my family that I take care of to still be taken care of if I were to lose my income, so, or by dying. There's other ways for insuring loss of income for other reasons, but this is by dying. Now, there's a couple of different life insurance flavors that you can get. The biggest distinction is term life versus whole life policy. Now, term life insurance only covers a certain number of years. You can get a term life policy for say 10 years or 20 years, while a whole life policy will cover the rest of your life. You might be saying, "Well, why would I ever want a term life "when I could get one that's whole life." Well, it turns out that a term life policy is usually cheaper, and why is that? Well, if you're say 32 years old like I was and you got a 10-year term policy 'cause you're just like, "Okay, over the next 10 years, "my family's gonna need help paying the mortgage," or whatever it might be. Or let's say over the next 20 years, if you get a 20-year term, "That could help cover my family through college, "through the mortgage, et cetera, "and then after that, my kids are going to be on their own. "They might not need it as much." And from an insurance company's point of view, if you look at a 32-year-old who's in good health, and they say the probability of them dying in the next 20 years, by the time they're 52, is fairly low. So we can give them a pretty low premium. So I didn't have to pay that much per year. Now, if you've got a whole life policy back when you're 32, the insurance company's gonna say, "Well, Sal's gonna die eventually, "and it's just a matter of is he gonna die sooner "or is he gonna die later?" And so they price it accordingly so that even if when they pay it out, you know, maybe you're 80 or 90 years old when you die, but that payout is still probably going to be less than the amount that you put in over the years, especially if you last 'til 70 or 80 or or 90 years old, because not only are they taking those premiums you're giving them, but the insurance company is investing it so they're also getting, they're getting the returns on that premium. So they do the numbers, they do the statistics to see, okay, if someone, let's say the average life expectancy is 75 or 80 years old. If they paid this premium all the way to that and were able to invest that premium, are we going to get more money than we have to pay out? But they're still probably going to ask for more money for a whole life policy 'cause they have to do that. In fact, almost always they'll ask more money for a whole life policy than for a term policy. So you have to decide, what are you trying to de-risk? What are you trying to cover? And then act accordingly. And one of the things that's a little bit depressing as you get older is I had gotten at the time a 10-year term policy 'cause I was like, "Oh, that'll cover my family." And then once I turned 42 and I wanted to get another 10-year policy, well, then it was a lot more expensive. And the reason why it was a lot more expensive is, well, the probability of a 42-year-old dying in the next 10 years is a good bit higher than the probability of a 32-year-old dying in the next 10 years. Now, there's also this notion about insurability, because they're not just gonna look at your age. They're gonna look at your health, they're gonna look at your lifestyle. If you like doing dangerous things, if you have things that increase your risk of death, well, they're gonna charge you more, and if you lead a very, very risky lifestyle, then they might not insure you at all, so that's this notion of insurability. When I got my last health insurance, someone came and literally took a blood test, they checked my blood pressure, they checked my BMI, my body mass index to just kind of figure out what the risk was. And there's all this questionnaire about my lifestyle, et cetera, et cetera. Now, the last thing I'll talk about is, and this isn't just applies to life insurance but it definitely does apply to life insurance, which is the notion of an individual plan versus a group plan. A group plan usually comes through, say your employer, where your employer says, "Hey, we're gonna give every employee we have "a life insurance policy." They might do other types of policies as well. And that's, they're just paying usually a fixed amount for every employee, and the insurance company isn't trying to differentiate because they're just averaging everyone out. Sometimes they might do a little bit of that, and that's nice. It's a benefit you might get from your employer, but if you leave your employer, that policy might not be effective anymore. So if it was a life insurance policy, if you die after leaving your employer, well, then it's not gonna be so beneficial. While on the other hand if you have an individual plan, one that you pay directly, well, that's just going to be tied to you. It's not gonna be tied to where you happen to work. So, if you're young, you're probably not thinking a lot about life insurance. Maybe you wanna talk to your parents and make sure they have life insurance. They may or may not appreciate the conversation, but it is an important thing to think about if we wanna make sure those that we care about are taken care of if anything really bad happens.