Every one eventually has to come to terms with their mortality. When they do, the financially responsible contemplate purchasing life insurance. Most people think of it as a way to pay for funeral costs, but it is so much more. So…
What is life insurance and how does it work?
To put it simply, life insurance is a bet. Basically your saying to an insurance company, “I bet you $xx.00 per year that I will die within YY years”.
What it truly is supposed to be is an income replacement tool in case of your premature death. When you die your family loses much more than just you, they lose your income as well. If a married father of two loses his life unexpectedly, how will his spouse and children survive without his income? They may have to sell their home, their cars, cash out retirement accounts, college funds or take out loans just to get by.
However, if the guy has insurance, his family gets a lump sum, non taxable payout that they can use to survive until they enact plan B. This gives the widow the option to go back to school, look for better employment, re marry, what ever she needs to do to make the money equation work. ( Yes, It can also be a woman in the scenario, I just write from my own experience).
So life insurance is an income replacement tool in the form of a financial instrument.
Who needs to be insured?
Most insurance companies will tell you that pretty much everyone should be covered. This is simply not the case. As stated above, it is an income replacement tool. With that said, if you don’t earn an income you do not need insurance. There are cases where it may be a good idea to have it just to cover funeral costs, but that is a situation each family and individual must consider on a personal basis.
Children should not be covered. They have no income.
Retired persons should not be covered unless their income helps run a household.
What insurance is NOT:
Insurance is not an investment vehicle. While some policies offer the option to invest some of your monies, that is not it’s primary purpose and it should not be used as such.
It is not a way to benefit off the death of someone else. It is unfortunately used for this purpose in business quite often and as a personal note I find it deplorable.
( I will be posting explanations of these policy types below over the next 2 weeks)
Types of Life Insurance:
If you have any questions about this topic feel free to post them below, I will update the page to reflect any questions that arise.