Life Insurance Primer

The purpose of life insurance is to help an individual, or a family, fill the financial gap that would result from the death of a family member.

Typically, it means that a surviving spouse and children would be able to continue the lifestyle they’re accustomed to if one person in the marriage were to unexpectedly pass away.

If one spouse could not earn enough to support the family in the event of the other’s death, could not continue their current lifestyle, or would be unable to attain their future goals, life insurance is worth considering.

This means that when determining life insurance requirements, you need to think very honestly about what financial contributions each person brings to the marriage. What percentage of the family budget does each earn? What are your investments? What expenses do you have on the horizon? What would the financial situation look like if one of you were to pass away suddenly?

The necessity for life insurance varies from family to family, but there are some general truths to guide your decision. A young couple that’s just starting to build savings generally doesn’t need it. A young couple with a baby and no savings, though, should probably consider it. A settled couple with children, fully funded college and retirement savings? Maybe not. To better illustrate these situations, though, here are a couple of real life examples:

A married couple with no children that both work to pay the mortgage and other bills wonder if they should purchase life insurance. They ask themselves several key questions: If one of us were gone, would the other still be able to pay the bills? Would they need to sell the house? Could they sell the house? How much do we have in savings? For the surviving spouse in this marriage, there would be many options available for continuing to work, pay the bills, and save, so life insurance wasn’t completely necessary.

Just because one partner in a marriage does not bring in an income does not mean that they do not need to be insured, especially in a home with young children. This partnership works like a well-oiled machine since one partner can work and travel for business while the other partner takes care of the children and the household. If, in this scenario, the homemaker were to pass, the remaining spouse might need to either change their job to one that would allow him or her to be home more; or would need to make arrangements for child care. Either of these solutions could require a major investment.
If your mortgage is paid-off, you have a fully funded 529 plan and a healthy 401(k), you might not have a strong need for life insurance.

All of these considerations point to the rule behind deciding to purchase life insurance: there will always be exceptions and individual considerations, so you must take the particulars of your own family into account.

If you do decide to purchase a policy, however, there are two basic types of life insurance to think about:

Term insurance: This type of insurance is designed to cover the risk that a person might die within a certain time period—5, 10, 15, or even 20 years. It is purchased and paid for annually, but there is no payment to you at all if you outlive the stated time period. You could compare this to car or home insurance—necessary coverage that you pay for annually with money that you may never see again, unless there is an accident.

Permanent life insurance: There are several types of polices in this category called whole life or variable life. Each of these policies pays upon death, with no predetermined time period. Because the insurance company is relatively sure that ti will have to pay on this policy eventually, these types of policies are typically more expensive than term insurance. It’s also worth noting that whole life policies generally have a “cash value,” meaning that if you decide to terminate the policy, there is probably a smaller amount of cash that you are entitled to, unlike term insurance.

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