I might be biased, but I really think everybody needs life insurance at some point in life. But I also try to be realistic and recognize that not everyone shares my bias, at least to the same degree.
There may also be real or perceived financial constraints preventing the buying life insurance; however, ultimately, the benefits of having it usually far outweigh the temporary pain involved in getting and paying for it. Since in an ideal world everyone would have life insurance, I want to discuss some of the good reasons to get it.
Please know that I do not sell life insurance or any other type of insurance. I am not a financial or an estate planner. I make no money from the decisions that you make. I’m here only to furnish information to help you make decisions that best serve you and your family.
6 Reasons to Buy Life Insurance
That said, here’s the list (in no particular order) and a brief discussion of each reason:
1. To replace lost income. If both you and your spouse or mate were working during some or all of your life together, you probably contributed to the support of each other. Upon the death of one of you, a source of income disappeared. Life insurance on the spouse or mate who died can replace the income that he or she provided. The amount that is replaced depends upon the amount of insurance payable at the time of death, and may not be a total replacement of support. The amount of life insurance payable at the date of death may be less than the face value of the life insurance policy if, for example, a policy loan had been taken against the cash value of a whole life insurance policy and was not repaid before death. All of this assumes, of course, that the survivor was named as the beneficiary on the life insurance policy. A “beneficiary” is the recipient of the proceeds of the life insurance policy.
2. To provide for the care and education of children. The reasoning behind this is similar to providing for a surviving spouse or mate. When the family was intact, before death, there may have been 2 parents to financially provide for the children. However, if one dies, household income is reduced; if the higher-earning parent dies, household income may be greatly reduced. Worse, if the parent who died was the only income earner in the family, the survivor may have to go to work and thereby incur child care expenses which had not been a financial factor to the family until then. Again, the amount of life insurance may not fully offset the additional costs resulting from the death. The option to take the life insurance policy proceeds as a lump sum may enable the beneficiary to invest part of them so as to produce future income and growth. Likewise, the life insurance company may provide an option such that it pays the policy proceeds in installments, sometimes with interest. Decisions about how to take the life insurance proceeds are financial ones and beyond the scope of this article.
3. To pay debts. More often than not, when people die, they die with unpaid debts. A life insurance policy can provide a source of money to pay those debts. Keep in mind, though, that the proceeds of a life insurance policy are usually paid to the person or entity named as the beneficiary as of the time of death. I said “usually” become sometimes there are disputes as to who or what is the proper beneficiary. Often, those disputes are based on claims that someone or something wrongfully induced the insured to designate him, her or it as the beneficiary. Therefore, unless the creditor is the beneficiary or unless the beneficiary has agreed with the creditor to pay the debt from the proceeds of the life insurance policy, the debt might not get paid.
I cannot and will not give legal advice in this article or elsewhere on this website because I am no longer licensed to practice law. Generally, however, if the estate of the insured is the beneficiary of the life insurance policy and gets the proceeds, creditors may be able to file claims against the estate and get debts paid through in that way. State laws differ as to procedure and time limitations for claims against estates, so a licensed attorney is needed for specific advice and direction.
4. To pay final expenses. The proceeds of a life insurance policy can be used as a source of money for a funeral, burial, and similar expenses. The proceeds of any life insurance policy can be used for this if the beneficiary wants to do so. Historically, there have existed so-called “burial policies.” They were typically small face amount policies designed to pay small sums of money for this purpose. They were often sold to low-income populations.
5. To pay estate taxes. When individuals of high-net-worth die, they run the risk of incurring estate taxes. A useful mechanism for estate planning may include the use of one or more life insurance policies to generate money with which to pay the taxes. This is an extremely technical field that requires expertise in the law, taxation, insurance and sometimes in other fields. I am not equipped to go into any details but you should be aware that life insurance can be an element of estate planning. Financial advisers, lawyers, accountants, and other professionals will be needed./
6. To protect business enterprises. When people are in business together, each contributes money and know-how, acquires a share of the enterprise, and obligates himself or herself to a portion of business debts. Therefore, each party has an “insurable interest” in the life of the other. Stated otherwise, because of the business involvement each has a stake in the continued life of the other. Because of that insurable interest, they can buy life insurance on each other. Then, if one of them dies, the proceeds can be used to buy his or her share of the business from the heirs of the person who died. Doing so prevents the need to either stay in business with a stranger (an heir of the person who died) or to close or sell the company.