Quora Answer: Do I Need Life Insurance?

The following is my answer to a Quora question: “Do I need life insurance?” 

That really depends on how you understand life insurance and how it works.  You cannot ascertain need until you have defined the subject matter.  In summary, an insurance policy is an exercise to mitigate risk.  In your case, you mitigate against the risk of loss of income for your beneficiaries, your family, in the event of your untimely death.  Or, you mitigate against the loss of income and the cost of lifestyle maintenance in the event of critical illness or disability. 

What the insurer does is take a premium, payable at a set interval, every month or year, from every person who seeks coverage, for whatever reason.  At a macro-level, the premiums of these policies are consolidated to service them.  In the event that there is a claim, it would be a percentage of all the premiums collected, which the insurer can afford to pay out.  In the perspective of the individual policy holder, it is all or nothing.  If there is no claim, at the end of the insured period, the policy lapses, or the insurer returns the premiums with or without some dividend. This is dependent on the nature of the policy contract.  If there is a claim, the policy pays out. 

Now, if you have no coverage, there is nothing to pay out in the event of loss.  There is no risk mitigation.  Whereas, if you had coverage, even in the event you never claim, you still had that coverage, and the right policy is a financial instrument in and off itself.  In modern insurance, you never lose that premium paid.  It either comes back at the end of the policy term, or as a claim, which may be many times the premium paid.  The exception is a term plan, where there is no claim at the end, the policy simply lapses. 

Unless you are certain to live to age 101, a life policy has 100% claim for death.  In a developed country, because of the excellent healthcare, you are likely to live long enough to get some form of critical illness.  Claim rates for critical illness plans is over 50%.  In light of that, I would say that it is extremely foolish to not have some form of coverage.