Is Life Insurance Really “Death” Insurance?

I tackle a popular objection to the idea of life insurance and explain the pitfalls of focusing too narrowly on the death benefit.

Thanks to Kaye Lynn Peterson for help proofreading.

“You’re worth more dead than alive.”

Many people have strong opinions on the efficacy of life insurance.

My chiropractor is apparently one of them.

As I entered his office and sat down on the table he asked what I do. After explaining capital at a 30,000 foot level, I explained that I specially design particular life insurance policies.

“Oh yeah, death insurance!” he replied. “You’re worth more dead than alive.”

This is a pretty pervasive misconception.

You can sort of understand why. It’s rooted in frustration with the idea of spending money in the form of premium payments on something that the individual buyer will never directly use.

People who see the value in paying relatively small amounts in the present so that their beneficiaries — usually their loved ones — will be financially better off after they pass away see past this objection. Not everyone shares the same well-wishes for the ones they leave behind, but that has less to do with the morality or usefulness of life insurance per se and more to do with an individual’s given set of values.

However, there’s a deeper problem. Life insurance isn’t just life insurance. It isn’t just about the death benefit. In fact, if you focus solely on the death benefit aspect of life insurance, you’ll miss the its real power.

Life insurance isn’t the only misunderstood, underestimated asset. Lots of things have a stated, formal purpose yet are used for complementary reasons. College is supposed to be about getting an education and a good job, but students use it for an opportunity to form social bonds and explore new, uncharted territory all the time. A job is supposed to be about making money and providing for a family, but individuals often find purpose and fulfillment in their work.

Life insurance is similar. If you focus on the death benefit, you’ll miss other important features. If a student focuses solely on grades or if an employee focuses solely on the paycheck, they too will miss other important aspects of college and work, respectively.

Specifically, life insurance is the best asset in which to build capital (accumulate savings). Unlike other assets, the value accumulated in life insurance is guaranteed, grows on a tax-favored basis, can be leveraged (borrowed against) on incomparable, contractually-guaranteed terms, and can provide a passive, tax-free income in retirement. If you focus on the death benefit, you might miss those important, unparalleled features.

Is it possible to insure death?

When you pay for life insurance, is it true that you’re actually insuring death? Is life insurance really death insurance, despite all the positive benefits of it?

No.

To understand why, we need to acknowledge why insurance itself exists in the market.

Insurance is about something called risk-pooling. It works like this: for a given asset, there is a relatively small statistical probability of losing it. Buildings can burn down, cars can get destroyed in accidents, and people can pass away prematurely (before their natural mortality). When you lose an asset, you lose all the services that asset would have generated for you.

If you lose your building, you lose the rents you could have charged residents or businesses. If you lose your car, you lose the ability to get to work or transport your family. If you lose your life unexpectedly, your family and loved ones lose what you would continued to do for them, e.g. provide income, share experiences, etc.

In other words, loss has a cost. That cost is high enough to where it makes sense for an individual to pay a relatively small amount on a regular basis to a company, so if the loss happens, the company can make one large payment to the individual. This is why an insurance payout is a replacement of a loss and not income.

Notice that in order for insurance to make sense, the thing or person insured must have value. Otherwise, who would pay money in the form of premiums in order to make up for it if it (or he or she) were lost?! Clearly, things we insure are valuable to us, otherwise the concept of insurance falls apart.

This is why life insurance is not death insurance. Death is not valuable. Life is. In fact, your life is your most important, most financially beneficial asset. No other asset will generate as much income, financial or psychic, as you will. Even other assets you own or will come to own must be operated by you. Your life is literally involved in every beneficial event you’ll experience.

Therefore, your life is your most valuable asset.

You insure your car, which is less valuable than your life (since it will generate less benefit to you than you will generate over the course of your life). So why wouldn’t you insure your life?

This is where people will say, “Well I’ll never use my life insurance!”

We covered this misconception above. In fact, if you never use your life insurance during your life, then you should get a new agent. Or you should stop listening to the people who have told you that life insurance is just about death benefit. Or both.

Life insurance offers unique benefits that no other financial contract can offer because of the unique nature of the concept. In other words, life insurance offers powerful benefits — other than the death benefit — because it is life insurance.

Most of those benefits have to do with optimal capital accumulation. Life insurance is the best asset in which to build capital (which is not the same as investing) because you pay into it for your whole life.

You can compare this to building capital — called equity — in a house. As you pay down your mortgage, you build equity (assuming the value of the house is more than what you owe on the mortgage). That equity is valuable! It can serve as collateral on a loan. In other words, you can often go to a lender and get a loan in proportion to how much equity you have.

One of the problems with a house is that you can only build so much equity. Eventually you will pay off the mortgage! On the one hand, this is good. You won’t owe any more money to a lender. On the other hand, you can’t continue to build capital! This is a problem if you consider that you actually can’t have too much capital.

In fact, in an ideal world, you would be able to build capital for as long as you live. That way, you could build as much capital as possible in your lifetime.

You can do this with life insurance.

To be precise, you can only do this with life insurance. No other financial asset allows you to build capital on a guaranteed basis for your entire life. This is the fundamental reason why life insurance is the best asset in which to build capital. The incomparable, highly favorable tax treatment, ease of collateralization, and maximum control over credit are all bonus features.

In conclusion, life insurance is not death insurance. Your life (not your death) is your most highly profitable asset. Since your life is so profitable, you should insure it, just like you insure other assets. If you do, and if you do it the right way, you’ll also build capital in ways you simply can’t do with other assets.

With so much capital under your control, the idea that you’re “worth more dead than alive” is silly. How many times can you turn over your capital? How many businesses can you start? How many opportunities can you take advantage of? What’s all that worth? The answer is yet to be determined. But for the individual who properly insures his own life and the lives of others, and builds capital accordingly, it will likely be far more than the value of the death benefit.