Simple answer: To create an instant "estate" for your loved ones before you have had time to build one.
In fact, a recent Forbes article goes further ... and thankfully so.
The article, titled "10 Things You Absolutely Need To Know about Life Insurance," notes that there is still a lot of confusion and skepticism about life insurance.
Why?
Perhaps it is because life insurance is seen by many as complex, the unfair image of those who sell it, or because it requires us to consider our own mortality.
Regardless, armed with the proper information, you can simplify the decision-making process and arrive at the right choice for you and your loved ones.
While you will want to click over to the original article yourself, here are some of the 10 things you absolutely need to know about life insurance according to the original article:
You really need it if you are someone's spouse or the parent of dependent children.
Only if you are retired or financially independent and no one would suffer financially if you were not around, then you may not need life insurance.
All others, however, should get insured.
That noted, you will never ever hear a widow complain about the life insurance her husband had.
Life insurance does not simply set an arbitrary monetary value on your life.
No, life insurance helps compensate for the financial consequences that accompany the loss of a wage earner's life. It can help those left behind cover the costs of final expenses, outstanding debts and lost income.
After an unexpected death, life insurance can lessen financial burdens at a time when surviving family members are struggling and dealing with great loss. Life insurance can also give peace of mind to you, the policy holder.
Life insurance is a risk management tool, not an investment.
There are some life insurance policies that have an investment feature, but they are not really an optimal investment. There are usually better and more efficient strategies.
On the other hand, if you are a Kansas resident, the cash value of any policy you have had for more than one year is beyond the reach of your creditors.
There are two kinds of life insurance—term and permanent, also known as whole life insurance.
Term life is the simplest, the least expensive, and the most widely applicable. The life insurance company bases the policy premium on the probability the insured will die within a stated term—typically 10, 20 or 30 years.
The term premiums are guaranteed for the length of the term, then the policy becomes cost-prohibitive to maintain (or you can decide to let it lapse). This means that you could pay premiums for decades and "get nothing out of it."
That is good news because it means you are still alive and were protected during the time protection was needed.
Permanent life insurance includes the same probability-of-death calculations, but it also includes a savings mechanism, often referred to as "cash value."
This cash value is designed to help the policy exist into perpetuity.
Whole life has an investment component, and variable life has investment options more like mutual funds. Universal life is a less expensive permanent life insurance alternative with added flexibility but increased interest rate risk for the owner.
Choosing the right life insurance policy does not have to be complicated.
It is better to set up something you can understand than to postpone such an important decision due to the policy's intimidating complexity.
In many circumstance, a good rule of thumb is to purchase enough life insurance to replicate all or most of the insured's income for a term as long as the household expects to need that income.
Open and honest discussions about planning for an unexpected death can be surprisingly life-giving.
Purchasing life insurance sets a solid foundation for your long-term and comprehensive financial plan.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: Forbes (January 5, 2016) "10 Things You Absolutely Need To Know About Life Insurance"
Comments