Crowdfunding = A Poor Substitute for Life Insurance?

    Crowdfunding = A Poor Substitute for Life Insurance?

    By Amy Fontinelle

    Crowdfunding has become a popular means of obtaining financial assistance in times of crisis, raising money for everything from natural disaster relief efforts to rebuilding burned down neighborhoods. But the digital fundraising avenue is also being turned to when a loved one has passed without a life insurance policy to finance burial costs or household expenses for surviving relatives. And that should raise concern.

    Sure, when someone is struggling it can be heartening to see family, friends, and even strangers pitch-in via crowdfunding platforms; essentially websites that let people raise money online through Facebook, Twitter, and email. A third party helps set up the campaign and manages the donations.

    But there’s a converse to the situation: such financial contributions may not be enough and are not guaranteed. Nevertheless, many people seem to be turning to that mechanism.

    For example, one of the most popular categories on one of the more well-known crowdfunding websites, GoFundMe, is memorials. There, you’ll find thousands of requests for financial assistance with funeral expenses, memorial funds and burial costs. You’ll also find requests for help with household expenses due to the loss of the deceased’s income. Anyone can use the site to ask friends, family, and strangers to donate to their cause.

    Of course we’re going to tell you there’s a better option: life insurance. But beyond our obvious self-interest, the crowdfunding phenomenon points out some serious considerations for everyone about life and financial planning.

    Experiencing the tragic loss of a loved one is bad enough. Not having the money to give them a proper send-off — let alone to care for the survivors who depended on that person’s income or other contributions to the household — only adds to the grief. Having to publicly beg for that money compounds the emotional stress of the situation, along with the additional worries that what money does come in might not be enough.

    Reasons People Go Without Life Insurance

    Why didn’t the people asking for money via crowdfunding sites have life insurance in the first place?

    In some cases, it’s because the deceased was a child. Some tragic examples from GoFundMe’s memorial section: A high-school-aged brother and sister die in a car accident. A second-grade girl gets struck by a car while out riding her bike. A 13-year-old suddenly collapses during recess and dies.

    Some financial pundits say you don’t need to buy life insurance for your children because they’re not likely to die1 and because in most cases no one depends on their income.2 And it’s understandable that families don’t always have the money to cover the unexpected expense of losing someone who dies so early in life. (That’s why some financial professionals do advise buying life insurance for your kids.3)

    In other cases, crowdfunding campaigns are for young parents who probably expected to live a long time and didn’t think they needed life insurance yet. Or perhaps they knew they needed it to protect their families but hadn’t gotten around to purchasing it. (Related: Life Insurance in your 20s)

    Other reasons why people don’t buy life insurance are that they assume they won’t qualify for coverage4 or they think they won’t be able to afford the premiums,5 so they never look into it.

    “Eight in 10 overrate the price for a 20-year, $250,000 level-term policy,” states a 2015 report from LIMRA,6 a worldwide association of insurance and financial services companies, and the insurance advocate and nonprofit Life Happens. A healthy 30-year-old could buy this life insurance policy for about $160 per year, but consumers on average estimate that this policy would cost at least $1,000 per year. Young consumers on average think it would cost even more: $1,312.

    A GoFundMe campaign might help you raise several thousand dollars, even tens of thousands. But you could get several hundred thousand dollars, or even a million dollars or more, from a life insurance policy. And your beneficiaries won’t pay taxes on the proceeds,7 whereas GoFundMe collects a fee of 5 percent of all donations received.8

    People also avoid shopping for life insurance because they don’t want to think about death, don’t trust insurance companies or agents, or get confused when they try to research life insurance.9

    Why You Need Life Insurance

    If you have a child, spouse, or dependent parent who would have trouble meeting financial obligations without your income — or without your ability to care for them — you need life insurance.

    Even if no one depends on you, if your family wouldn’t have the financial resources to handle your final expenses, a small life insurance policy that you take out now could alleviate a lot of their stress if you die prematurely.

    Insurance is supposed to protect against foreseeable risks so you don't have to turn to crowdfunding. While none of us knows how or when we will die, we know that it will happen. Death is a foreseeable risk. You need to insure against its financial impact on your loved ones, just like you buy insurance to deal with other foreseeable risks: getting seriously ill, getting in a car accident, or experiencing a house fire.

    There are two types of life insurance: term and permanent. If cost is a concern, look at term insurance, which provides a death benefit for a certain number of years: 5-, 10-, 20-, and 30-year terms are common. Permanent life insurance stays with you for life as long as you pay the premiums, but it costs more since there’s a higher likelihood that your beneficiaries will one day file a claim. (Find out more about the different types of permanent insurance here).

    For people between 50 and 75 who may have health problems, there’s guaranteed acceptance life insurance, which doesn’t require a medical exam. Benefits are limited to a small sum to help cover final expenses and there may be a waiting period during which benefits aren’t payable if you die(MassMutual provides a limited benefit in the first two years). This provision helps to protect insurance companies from the risk that only the people most likely to file claims will purchase insurance.

    Even if you do have a life insurance policy, you might be underinsured. In fact, 30 percent of people who do have life insurance think they don’t have enough,10 according to the 2015 LIMRA study.

    Consult a financial professional to get help evaluating your life insurance needs and purchasing a policy you can afford. Don’t put your family in the position of having to beg for money online if you die unexpectedly.

    More information:

    Individual versus Employer Life Insurance: A Comparison

    Building Your Financial Pyramid



    1 Bankrate, “2 reasons you may decide to skip buying life insurance for your kids,” February 3, 2016.

    2 FOX Business, “Should You Buy Life Insurance for Your Kids?” June 4, 2014.

    3 Nerdwallet, “Should I Buy Life Insurance on My Children?” August 28, 2013.

    4 Life Happens and LIMRA, “2015 Insurance Barometer Study,” April 2015.

    5 LIMRA, “Facts from LIMRA: Life Insurance Awareness Month,” September 2015.

    6 Life Happens and LIMRA, “2015 Insurance Barometer Study,” April 2015.

    7 IRS, “Life Insurance & Disability Insurance Proceeds.”

    8 GoFundMe, “Pricing & Fees.”

    9 Life Happens and LIMRA, “2015 Insurance Barometer Study,” April, 2015.

    10 Life Happens and LIMRA, “2015 Insurance Barometer Study,” April 2015. 

    The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel.

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