Archive for September 9, 2009
One of the most ancient questions in the history of the life insurance industry is if you should get whole life or term term life. The first thing to realize is that this question might be a little shallow. The next thing to keep in mind is that it might not matter. I’ll explain more later…
But first, a quick history of life insurance. The first life insurance policy was written in 1583 in London. It was a type of term life that we would call “annual renewable term”. Each year, you would pay a small sum in exchange for the coverage. The following year, you could either pay another sum for another year or decline the life insurance.
It was very simple, but the problem with this type of life insurance is that each year, as you got closer to death, the sum for life insurance coverage became more and more. In an attempt to keep the premium amount level during the entire life of the insured, different types of permanent life insurance were invented.
For the most part, permanent life insurance became the primary type of life insurance people would use for the benefit of their family and to cover their debts. This may have been partly due to the fact that the life insurance industry at the time lacked transparency and a wide variety of choice and competition.
After the American Civil War and through the industrial age, increased innovation, marketing, and changing attitudes and economies resulted in an increase in life insurance sales.
Eventually, folks began to like the simplicity of term again. And with the information age and the internet, a few companies began to spring up in the 1990’s that made comparing life insurance easier than ever. Although the system wasn’t perfect, it was a heck of a lot better than before.
So back to the original question of what type of life insurance you should get. Well, nobody knows. And if they pretended to tell you based on a simple question with no background information, that dogmatic stance will not always help you out. The fact of the matter is there are many more types of life insurance than just two – a point I wanted to make by going through the history of life insurance. And all types of life insurance are variations on each other because they use the same concept of displacing risk. That is why the question “should I get whole life or term life?” is too simplistic.
But the good news is it might not matter. Because all types of life insurance are variations on a theme, many of them could be used in flexible ways to solve your goal. So figure out your goal first.
Ask yourself, “Why do I need life insurance?” Make your answer specific. Now that you have your goal, go hunting for the solution. If you keep your goal in mind, you do not have to worry about the tools, only the end result.