WHY BUY LIFE INSURANCE?
by
Charles Lamson
Life insurance planning is an important part of every successful financial plan. Its primary purpose is to protect your dependents from financial loss in the event of your untimely death. In essence, it provides an umbrella of protection for your loved ones by protecting the assets you've built up during your life and providing funds to help your family reach important financial goals even after you die.
Benefits of Life Insurance
In spite of its importance to sound financial planning, many people put off the decision to buy life insurance, in part because life insurance is associated with something unpleasant in many people's minds---namely, death. People do not like to talk about death or the things closely associated with it, so they often put off considering their life insurance needs. Life insurance is also intangible. You cannot see, smell, taste, or touch its benefits---and those benefits mainly happen after you have died. However, life insurance does have very important benefits that should not be ignored in the financial planning process.
The benefits of life insurance include:
Just like other aspects of personal financial planning, life insurance decisions can be made easier by following a step-by-step approach to answer the following questions:
Do You Need Life Insurance?
The first question to ask when considering the purchase of life insurance is if, in fact, you need it. Not everyone does. Many factors, including your personal situation and other financial resources, play a role in determining your need for life insurance. Remember, the major purpose of life insurance is to provide financial security for your dependents in the event of your death. Life insurance can also provide other benefits but they are all a distant second to this primary reason for buying life insurance.
Who needs life insurance? In general, life insurance should be considered if you have dependents counting on you for financial support. Therefore, a single adult who does not have children or other relatives to support may not need life insurance at all. Children also usually do not require insurance on their life.
Once you marry, your life insurance requirements should be reevaluated, depending on your spouse's earning potential and assets---such as a house---that you want to protect. The need for life insurance increases the most when children enter the picture, because young families stand to suffer the greatest financial hardship from the premature death of a parent. Even a non-wage-earning parent may require some life insurance to assure that children will be adequately cared for if the parent died.
As families build assets, their life insurance requirements continue to change, both in terms of the amount of insurance needed and the type of policy necessary to meet their financial objectives and protect their assets. Other life changes will also affect your life insurance needs. For example, if you divorce or your spouse dies, you may require additional life insurance to protect your children. In contrast, once your children finish school and are on their own, the need for life insurance may drop. In later years, life insurance needs vary depending on the availability of other financial resources, such as pensions and investments, to provide for your dependents.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 322-323*
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