Whenever I see anything related to personal finance, I often hear about what should be done with savings or how investments should be directed. Something I noticed a lot of people have left out is life insurance. They view it as an entity that’s completely separate of their financial plan when they’re one in the same. Life insurance plays just as important of a role as savings or investment; savings and investments represent the offensive side of a financial strategy whereas life insurance represents the defensive side. In my opinion, life insurance is one of the most underrated and misunderstood financial tools out there. You can start an investment at any time. It doesn’t get more expensive as you get older and it isn’t something you will ever have to qualify for. Life insurance is exactly the opposite. Let’s also look at it from a protection point of view. Suppose today you put $100 in a mutual fund. Tomorrow on your way to work you get into an accident and are instantly killed. What’s that $100 in investments going to do for your family compared to what it could have done in life insurance? That same $100 could have provided thousands of dollars in death benefits. Which would you rather have, thousands of dollars, or just $100?
Life insurance, like any other kind of insurance, is there you protect you and your family from any unforeseen circumstances that might come up. In this case we’re talking about death; it’s there to protect your family in the event that you pass away. Unlike every other kind of insurance out there like home insurance, auto insurance, or liability insurance, life insurance is the only “when” insurance. All the other types are “what if” insurance. What if something happens to your home, what if something happens to your car, what if someone decides to sue you, etc. It’s possible all these things can happen, but none of them are guaranteed to happen. Life insurance is the only one where we know the end result; nobody lives forever. The question isn’t whether or not if you will die, it’s when you will die and it’s up to you to make sure that your loved ones, whether it’s your parents, spouse, or children, are going to be financially able to cope with your death.
I’m not sure if you’ve ever had to deal with the death of a loved one before, but dying can cause both an emotional strain and a financial strain. There are final expenses to consider which include a number of different areas like funeral expenses, medical bills, various attorney fees, and estate and probate taxes. All of these costs add up. I’ve seen final expenses run as little as $20,000 all the way up to $500,000. Not having life insurance means that your family will have one more thing to worry about when you pass away.
A common misconception is that the only people who need life insurance are older people, typically married with children. This could not be further from the truth. In my opinion, everyone could use life insurance. It is the tool that you use to make sure that even though you’re not there, your family will still be able to carry on.
Let’s say you’re young, single, and have no dependents. If something happens to you then it’s likely that your parents are going to be the ones who have to pick up the final expense bill. How many people do you know that were in their twenties or thirties that passed away peacefully in their sleep? That doesn’t happen very often; when a young person dies it’s usually due to a tragic accident. And typically with tragic accidents come hospital bills. How would you feel if you passed away and you left your parents with a $50,000 final expense bill? How do you think they would feel? What do you think that’ll do to their retirement and any other things they might have been saving up for?
If you’re married with kids, then this becomes even more important. Think about your spouse. If you were suddenly taken out of the picture, would he or she still be financially able to continue to live the lifestyle you two had before? Would he or she be able to pay the rent or the mortgage? Pay off any debts you might have accumulated? Raise your children and send them off to college?
If you’re older and have a lot of assets, then the picture becomes more complicated. If your spouse has already passed away, then your kids are probably going to be the ones who pay for the funeral expenses and any hospital bills. On top of that, they’re going to have to deal with estate and probate taxes on the inheritance you left behind for them. These taxes are paid for in cash so if you don’t leave behind enough liquid assets, then your kids will have to scramble to come up with that money.
Hopefully you’re starting to see the importance of this financial tool. However, just having any policy isn’t enough. You want to make sure that you’re adequately covered so that you’re not underinsured, leaving your family unprotected or that you aren’t over insured and paying for something you don’t need. You also want to make sure you have the right type that fits your specific needs as there are many different kinds of policies out there. Lastly, you want to make sure that the insurance will be there for your family when they need it the most.
So how do you figure out how much life insurance do you need? That’s something I’ll cover in my next life insurance post.
Next life insurance post: How to Determine Your Life Insurance Needs
Previous life insurance post: Understanding the Difference between Term Life Insurance and Permanent Life Insurance
All works here are my own and are considered works in progress and may be subject to change at any time. The opinions expressed here are mine only unless otherwise noted. I am not being paid by a third party to endorse a product of any sort. These writings are written for my own references. I do not claim to be a professional of any kind so follow any information you find here at your own risk. The facts that I post on here are things that I believe to be true, but may not necessarily be so. This is the internet; do your own fact checking and take everything with a grain of salt.