Simply put, life insurance is a contract with an insurance company that exchanges a lump sum of money upon a policy holder’s death in exchange for premium payments.
Realistically, however, life insurance is safety-net between personal tragedy and having time to make important readjustments in your family.
The main reason to own life insurance is to give cash when most needed.
One of the most important functions of life insurance is to give immediate non-taxed cash with proceeds from the policy. The death of a husband, wife, mother, father is devastating and it brings on immediate major financial adjustments within the family.
Not only does life insurance protect a spouse and children from potential financial loss, but it also gives needed time to consider carrying on without their family member.
Of immediate concern is the need for a family to keep up their lifestyle. Enough changes will begin to surface, so it’s important that survivors have time to make tough decisions.
Secondary concerns are selling a home, relocating closer to other family, or preparing to enter the workforce.
During this period of family loss, decisions happen in an emotionally charged. Time is critical for proper recovery when suffering through a loss.
Life insurance gives a family both time and choices, providing cash to pay off debts, meet ongoing mortgage payments, and cover other living expenses. This cushion of time is critical for allowing loved ones to sort their way through a permanent lifestyle change.
Another job of life insurance is to replace income when a family members dies. When choosing an amount of insurance to buy, people often think only of covering assets and paying expenses, and not that a lifetime of income is lost.
There will, of course, be some sources of income in the way of savings, social security, spousal benefits from a job, and others after a loved one’s death. But, these have a way of quickly drying up and seriously fall short of a lifetime in earnings.
Here are three quick examples to underscore this point.
Assume a young family of two earners forced to recover from the death of one spouse, who was earning $60,000 a year and was 30 full years from retirement.
The minimal amount of life insurance needed to replace this salary over the lost lifetime of the earner would be $1,384,000.
Pretty sobering thought to consider, that in addition to all the other issues the remaining spouse is wrestling, over one million dollars will be lost from the family.
For someone earning less, say $30,000 per year, the income lost over 30 years would be $461,000 or close to a half million dollars.
Considering a person closer to retirement, say earning $90,000 and 15 years from retiring the income lost would be $1,185,000.
Regardless of personal circumstances, the fact is a lifetime of income is lost when a family member dies. During the readjustment period, life insurance helps recover some of this lost income.
When you really get down to it, we can do without a lot of things when faced with family misfortune, but recovery time is something we can’t do without. Life insurance makes recovery time possible by providing immediate non-taxed cash for the family.
I have been an active investor for over 35 years. My lifelong interest in personal finance has led to teaching community classes to a variety of groups. Retirement activities include travel and serving as a volunteer site coordinator with the VITA Tax Program.
My investment experience is in Equities, REITS, Oil & Gas Royalties, Utilities, and Varied Fixed Income.
JG is not a registered investment representative. The opinions of the author are not recommendations to either buy or sell any security. Prior to investing, please conduct your own due diligence and talk to your financial advisor or security professional.