With the constant flow of television advertisements and recommendations from financial advisors trying to sell insurance products, many people have a skewed view of who actually needs life insurance. Undoubtedly, life insurance products serve an essential service, providing a tax efficient way to transfer funds to beneficiaries who may be dependent on your income and will face substantial funeral costs upon your death. (Learn how much - if any - insurance you really need. Check out How Much Life Insurance Should You Carry?)
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Similar to all investment portfolio decisions, the need for life insurance should be assessed from a total wealth asset allocation and lifestyle perspective. Similar to risky stocks of speculative micro-cap biotechnology companies, which are suitable for young investors yet have no place in a stable retirement portfolio, some people should save their money and avoid purchasing life insurance.
Life Insurance Misconceptions
A clever study conducted by The Life and Health Insurance Foundation for Education reveals that many individuals are not familiar with who exactly needs life insurance. In their study, properly named "Does Batman Need Life Insurance," over 1,000 adults were surveyed regarding the life insurance needs of five fictional characters: Batman, Fred Flintstone, Harry Potter, Marge Simpson and Spiderman. Not surprisingly, Spiderman and Batman topped the list with the most votes, followed by Fred Flintstone, then Harry Potter and finally Marge Simpson.
Batman Does Not Need Life Insurance
Life insurance demand is typically inversely related to financial wealth. Ignoring the tax and legal ramifications of various estate transfer alternatives, the rich can provide their heirs with sufficient capital without purchasing life insurance policies. Thus, Batman, who according to Forbes' Top Fictional 15 list currently has a net worth of $6.5 billion, would easily be able to provide for his dependents without life insurance. Furthermore, and possibly even more importantly than the first point, since Bruce Wayne does not actually have any dependents, his demand for life insurance is insignificant. A low desire to leave an inheritance for others is driving factor in decreasing the need for insurance.
Spiderman Does Not Need Life Insurance
Likely due to Spiderman's high probability of death, he was selected as most likely to require life insurance. Although a high probability of death increases life insurance demand, this probability typically refers to the likelihood of death from old age. Assuming that Spiderman walked into a Statefarm office and tried to sign up for a life insurance policy, based on his high risk nature of his profession, his income from The Daily Bugle would not be enough to cover the premiums. Young adults without children or a spouse should not generally carry life insurance. In Spiderman's case, since he is more financially dependent on Aunt May than she is on him, Spidey should save his money. Harry Potter falls under a similar category; he neither has dependents who rely on his income nor has a family who will be financially burdened by his death.
A low aversion to risk commonly corresponds with an aggressively invested investment portfolio and a low demand for most types of insurance products. Risk seekers such as Batman and Spiderman (or regular individuals who simply prefer to take investment risks rather than allocate their funds primarily to fixed income securities) will typically avoid the protection offered by life insurance.
Marge and Fred Need Life Insurance
In contrast to the superheroes, Fred Flintstone and Marge Simpson are the common types of individuals who should carry coverage. Fred is the primary provider for his family and has dependents that rely on his income. In the event that Flintstone is to pass away, his family would require supplementary funds in order to continue living a normal life. Likewise, Marge also requires more life insurance than the aforementioned superheroes; her non-monetary contributions provide a vital service to the family. According to a study by salary.com, the responsibilities performed by stay-at-home moms amount to $122,732 per year if someone was paid to perform the equivalent tasks. Thus, if Marge was to pass away, Homer would have to incur these additional costs.
The Bottom Line
The study performed by The Life and Health Insurance Foundation for Education points out some of the major misconceptions that many people have regarding life insurance. Sometimes unbiased information on the subject is difficult to find because advisors have a financial incentive for selling life insurance. Nonetheless, financial professionals are often the best source for such information as they are familiar and have experience with different possible scenarios and have knowledge about a wide assortment of insurance products.
Generally, a low probability of death, large accumulation of wealth, no desire to leave an inheritance and low risk aversion decrease the demand of carrying life insurance. (The most difficult aspect of this complex product is determining how much coverage you need and why. See Top 10 Life Insurance Myths.)