Wednesday, November 08, 2006

Is life insurance outdated?

Let’s face it. Some of the largest companies in America are Insurance companies. I am in my mid thirties (dead nuts mid thirties). I have a wife and a kid. Comparing my life with my parents and grandparents life I find some remarkable ideas for not holding $$ in insurance policies. We are talking about comfortable middle class America. This example cuts out the high and the low wage earners.

Grandparents / Parents: The concept of the American family life was different in account holdings back then (1900 ~ 1980). The typical American household had a male working bread earner. The wife stayed home and the male had either a pension plan or nothing. The majority had the nothing choice. My linage is the later. Social security was their path to retirement. My Grandparents still keep all their life savings in CD’s. CD’s are safe and secure. Sure, they are not gaining anything on inflation. However, they are not losing value. What they have should carry them out – not withstanding medication cost. I am not touching that issue.

My parents in the family building stage started as a male bread earner and a stay at home mom. Things changed and both parents were eventually working. So, we developed the latch key generation. I am smack dab in the middle of that one. While I was young, my parents purchased life insurance. After the bills where paid and a little deposable income was spent on life’s pleasures, there wasn’t much left to save. Savings accounts at the time paid fairly good return. Many times better than they pay these days. So, an insurance policy where you pay $20 a month (not too painful) ensured a $100,000 pay out upon death. You sure weren’t going to get to a $100,000 in your savings account. This ensured your spouse would not starve to death. Stock purchases were out of reach as a savings path since the starting balance and agreements made them out of reach for this class of society.

After raising their family (my sister and me), my parents were introduced to a new thing called 401K. This is a good way to invest. However, by the time they are entered and the remaining years to participate, there is not a long time to build that nest egg. After all, this is the generation that is going to break the social security bank. Thanks mom and dad! Just kidding – I am not relying on that one. Insurance policy – okay, I understand the value here.

Now, here I start speculating. My generation is so totally different from the two I describe above. The tools and avenues in which I have to garner a nest egg are so vastly improved from my parents. If I am savvy enough, I should be able to bypass the insurance scam (life/annuity/term/whatever).

I started my career in 1994 with a 401K plan after my 90 day probationary period. I socked it away. Let’s put the whole amount away. If I don’t have it from the start, I will never miss it. Currently, here I sit with as much money at 35 in my 401 as my mom and dad. I will pause here and say the $100,000 example is covered. Let’s continue before conclusions.

I married in 1998 and my wife walked into one of the sweetest jobs on the planet. From the start she had a good salary, great benefits, well stocked selection of 401K items. She starting putting away before tax income and has built a really nice account. Hers blows mine away if you ratio it out by Total dollar value / Years of participation. Together, we are comfortable sitting in the middle class. We don’t have visions of being ultra rich. We are down to earth people who make good money, pay tithes, save good money and spend good money. We don’t have extravagant taste. My vehicle is 7 years old and paid off. We purchased her a used van last year. As long as the creek don’t rise and well don’t dry out, retirement is covered very well. (Southern slang thrown in for effect).

The Internet Boom: One of the best avenues of saving was brought to the masses via the internet. Online stock trading rivals sliced bread for the greatest thing ever. How Edward Jones and others stay in business is just a testament of how lazy American have become. I have an online account. I am building it larger and larger every year. I have learned a lot over the last 4 years of having that account. This account isn’t sitting in some large company’s coffers paying bonus to jerks that make cold phone calls or door knocks to the mindlessly lost buying annuities. Side note: Every Blogger either dreams of writing a book or will be dreaming of it one day. My dream is the common investor book. I just know I have some wisdom that can help many people. (It’s not time for that now.) For less than $10 you can buy and sell stock. You can buy as little as 1 share. This opens up the door to stock investing to anyone with the brain power of how to turn on a computer.

Little One: Our child was born in January 2001. She barely missed being a binary child. By that, I mean she could have had a binary birthday code. 011001. The geek in me is laughing even if you are not. Around that same time a system came out that I think is still way under used. Can you say 529? I bet you can. (Mr. Rogers – remember the latch key segment). Another savings avenue that allows you to save post tax – tax re-credit dollars. Little one is only 5 and she has thousands tucked away and growing for that important time of party days – I mean college days.

This post is getting long and I am exhausting my thoughts. Let’s ask some questions.

If a middle class family:
Who both parents are employed by established companies.
Who both participate heavily in their 401K plans.
Who are routinely buying stock and seeing standard stock gains.
Who are stock piling college funds in 529.

Live in a low crime area – “odds” of us dying in a midnight drug raid is slim

Drive small distances to work, school and around town mainly – “odds” of us dying in a midnight high speed chase is slim.

Healthy and come from healthy families. Diabetes is the only odds that get any mention of validity.

Young enough to be able to change a few things to overcome a young death of a spouse to compensate for the loss in income. (Just downsize to fit single income source – either income could pay a middle class starter home mortgage (might even be able to pay cash for it with 401K beneficiary payout))

Does this situation lead you to think they need to purchase a Life Insurance Policy?

I just don’t see the point. Insurance is a “bet” on things going wrong. As a very amateur poker player, I can’t calculate any odds that would make me place my money over the insurance line. I prefer to place it in stocks and own the money 100% and make the small gamble that while it builds in value, nothing will happen to me. Betting that once the value is grown, my payback benefits will be expedientially higher than the comparable insurance policy pay out.

I need to hear some comments on this one – Please. Anonymous or not.

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