Why do I need Life Insurance?
Basically, we buy life insurance to leave money to our loved ones when we die. Although many people leave behind life insurance when they die of old age, and it is a good idea to do so, its more important function is to care for those we support if we die prematurely. We do this by buying enough life insurance to replace the income that we would have generated if we had lived.
Although there are other things that can happen in life that may produce special needs,
most people can categorize their basic insurance needs in three distinct time periods.
When you are single with no others depending on you for support. Do you need life insurance? Well, you do but only for two things – to pay for your final expenses if you should die, and to pay off any debts that you might leave behind. Realistically, most of us when we are young and single don’t give this much thought or planning, so it is often up to parents to keep a small policy on their single, adult children, because in most cases they are the ones that would end up being financially responsible if an adult child were to die.
The moment that you become financially responsible for someone else, your life insurance needs change dramatically. This means you go from a very small need to the greatest life insurance need you will have in your life. For the majority of people, this is when you get married and/or have a child or children. If you take your responsibility seriously, you should have enough life insurance so that if you were no longer there to provide your family with their financial needs, then your life insurance proceeds should be able to do just that.
When your family is grown and all responsible for themselves, and there is now just you or you and your spouse to care for, your needs are sort of back to where they were at level one, except it is unlikely that your parents are there to pay for your final expenses. So, again, your needs are – enough to pay for your final expenses, and any debts that you might have.
Now, this is a little over simplification. There are many other things to consider and too many possible scenarios that impact the amount of insurance and type of insurance you need. You must also keep in mind that there are various types of Life Insurance: Whole Life, Term, and Universal Life insurance, each unique in their design and purpose.
Whole Life Insurance
Universal Life Insurance
Term insurance is designed to last a specified amount of time such as 1 year, 5 years, 10 years, or up to a certain age. At the end of this time, the policy expires. In order to continue coverage you must renew the policy for the next period. In most cases, due to the fact that the person has aged, the new premium is higher than it was a year before. Many companies impose age restrictions for term policies. Due to the fact that they tend to have a short duration of coverage, most term policies do not have cash values, or the ability to borrow against it.
Whole Life insurance is the traditional policy with level premium payments designed to remain in force over the entire lifetime of the insured. More expensive than Term Insurance, Whole Life policy early premiums tend to be higher than required to cover the probability of death. By doing this, the policy has a base reserve. This reserve, along with accumulated interest and the premiums that continue to be paid, cover the years later in life when the insured is more likely to die. Paying the initial higher premium enables the premium to remain level in later years.
Universal Life Insurance is a flexible premium, adjustable benefit policy with a current interest rate applied to most of its benefits. In one contract it blends term insurance and a savings account earning current interest rates. Unlike a whole life policy, its premiums can be increased or decreased, paid when due or at unscheduled dates or stopped entirely and restarted at the owner’s will, provided the policy value is adequate to maintain the cost of the insurance.
Think of it this way…
Term Insurance is like a taxi. You are the passenger and control where you are going but only for a limited period of time. Once you reach your destination safe and sound, you no longer need the taxi, or the coverage. But if you had on-going destinations, then you might need a nice family car or Whole Life Insurance. Unlike with the taxi, you pay for a car over a period of time and can keep it for the rest of your life, or sell it if you no longer need it. And when you die, the “car” is “sold” for a tax-free sum of money that is left to whom you designate. Whole Life or Permanent Insurance is there for your lifetime to provide a tax-free benefit to your beneficiary(ies). Universal Life is like owning a limousine that allows you to “transport” a variety of family members and other “passengers” to many destinations offering unique features to help plan your estate while alive and after you die.
For the most part, I believe your needs can be better filled by consulting a good, well trained Financial Planner who has your best interest in mind. Today, Financial Planners are better qualified than ever before to help you identify your needs, and find you the best products. Someday, you may need the personal advice of a seasoned specialist who knows you personally, and will still be there and willing to serve you when you really need it.