Updated: Oct 15, 2020
Today, let's talk about the "windfall" that life insurance creates.
Or rather, how it is NOT a "windfall" at all.
Insurance companies are not in the business of making people rich. They are in the business of transferring risks. And insurance companies have guidelines regarding how much a person can be insured for.
Just because you may want $5 million of coverage, does not mean that you'll qualify for it - medically OR financially.
This is a chart of the financial underwriting guidelines for one particular insurance company:
Now, you may wonder... "Why would an insurance company insure my $100,000 income at age 28 for up to $3,000,000? You might guess that it's about the "likelihood of them dying", so it must be cheaper to insure them.
And you'd be wrong.
The reason is because of INTEREST RATES. Today's interest rate environment, in order to secure $100,000 of income @ 1% (at current bank rates) would require $10,000,000 in coverage. Yet, you'd only maximally qualify for $3,000,000. $3,000,000 @ 3.3% would generate $100,000 per year.
In most cases, life insurance is NOT a "windfall". It is income replacement for the insured who passed away. It is to continue their income (perhaps dipping into principal) in order to secure the lifestyle of those who survived the insured.
Watch this quick 3 minute video of Tom Hegna describing his meeting with a widow who had a $1,000,000 death benefit... and was initially planning on building a custom home, etc., and how she didn't realize how the proceeds were meant to be used.
This is just another reason why planning is ideally done as a couple, rather than spouses who have their own separate plans - so that the rationale and the planning methodology can be shared and discussed together.