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Life insurance is something that no one wants to talk about – except those who sell it (and I do not sell life or any type of insurance or insurance product), but it is an important category to consider when creating your financial plan.
What is Life Insurance?
Life insurance is essentially a contract between you and an insurer that guarantees a lump sum payment (most common) in the case of the death of the insured in exchange for the payment of a premium by the insured. Life insurance can be used as a complex planning tool, but for our purposes, we are going to primarily discuss the basic premise and use.
There are various types of life insurance including term policies, whole life, universal life, and variable universal life. Again, for simplicity’s sake (and in our opinion) we are going to focus this post on term policies. Term policies are a bit like any health or dental insurance policy in that you pay the premium whether or not you actually use the policy. These policies typically come in terms of years, usually 10, 20, or 30-year policies (or some sort of variation of this time period). It is meant to cover you during the time period covered by the policy, meaning you will receive the death benefit if the insured dies within that time period. For example, if you purchase a 20-year term life insurance policy, then the insured person would have coverage (meaning their beneficiary would have a payout) if the insured dies within the 20 years they are paying the premiums on that policy. If the insured dies after the term expires, then there is no payout for the policy1.
Why is Life Insurance important?
Life insurance is one of those things that is sometimes considered after it is needed. Let me give you an example. My brother tragically died a few years ago. Unfortunately, he had changed policies and hadn’t signed up for a new policy yet before his death. This meant that at 35 years old with 3 children, he wasn’t able to leave many financial reserves for his wife after his death. In its simplest form, life insurance is important if someone depends on your support (either financial or work/support they provide the family) and if you were to pass away, they would need the financial means provided to continue in their current lifestyle.
When do you need Life Insurance?
Life insurance is important to consider if you still have children at home and/or your spouse depends on you financially or they depend on the work you provide. For example, it’s pretty easy to see that if one spouse works and the other spouse stays at home, that it is important to make sure the working spouse’s income is replaced so that the household can continue on financially after the death of the working spouse. Often though, the stay at home spouse is forgotten when it comes to life insurance since it is more difficult to consider the financial means needed to continue the household lifestyle, but I’d argue this spouse is as important as the working spouse contributions and it’s vital that both spouses are covered if there are children in the home or other dependents (i.e., parents, adult children with disabilities, etc.) that depend on the services or income of either spouse.
In closing, I hope this post has helped you consider the need for life insurance if you haven’t considered it already. Please make sure and do not wait. No one wants to have to have life insurance, but life happens and its important to be prepared.
1 Other policies, like whole life, universal life, and variable universal life, operate on different criteria so keep in mind that this example is only for term life policies.