The main purpose of life insurance is to provide financial protection or economic security for the survivors of the individual insured by the life insurance policy.
However, the need for that protection varies based upon circumstances. A simple example is that a single person with no dependents may think that life insurance is an unnecessary expense. That may be true at that point in life. But, when he or she becomes a parent, circumstances change so that life insurance becomes necessary. That’s because money is needed for child-rearing expenses, education, and other costs. Also, before the death of a parent, both the mother and the father may contribute to household expenses. After death, only one parent is remaining, so additional funds may have to be found. Life insurance can be that source.
Too, financial security needs change over time so that the amount and type of life insurance required may also change. For example, when a child is grown and self-sufficient, it may be possible to reduce the amount of life insurance because one reason for it no longer exists.
Uses of Life Insurance
While the cost of raising a child is a primary consideration for life insurance, there are others, including:
- Retirement income. This can work in a couple of ways. Please understand that I am not a financial advisor and anything that I state is not intended or should be interpreted as financial or investment advice. Instead, it is a general discussion of potential uses of life insurance.
- Term life insurance pays a death benefit only and does not accumulate cash value. Therefore, if the life insurance policy is in force when the insured dies, the beneficiary will ordinarily be paid the face value of the policy. The reason that I use the term “ordinarily” is because there are sometimes defenses raised by the insurance company to the payment of the policy proceeds. These can include, who is the proper beneficiary (there may be competing claims), or whether all premiums have been paid.
- If a spouse is the beneficiary of the life insurance policy and receives the proceeds, he or she can invest them. The earnings from the investment(s) can provide a stream of income to assist with the survivor’s retirement.
- Whole life insurance accumulates cash value and pays a death benefit. The death benefit can be invested by the beneficiary of the insurance policy in the same way as proceeds from a term life insurance policy. However, in addition to that, while the insured is alive, some of the cash value can be withdrawn and used for retirement living or can be invested. Regardless of the reason for the withdrawal (called a “policy loan”), the money taken out of the cash value accrues interest at a rate stated in the life insurance policy. While the policy loan does not have to be repaid, if it isn’t, the accumulated interest, plus the loan, depletes the death benefit that is payable when the insured dies.
- Charitable donations. Life insurance can be purchased by an individual for the good of a charity. The charity would be named as the beneficiary of the life insurance policy and proceeds paid to it upon the insured’s death.
Business needs. A company or the people who own it have several reasons for buying life insurance. While life insurance does not insure the enterprise itself, the business may have an insurable interest in the live(s) of one or more of the people. Examples include, but are not limited to:
The proceeds of a life insurance policy can ensure that there is enough money available to continue the business if an owner, partner or another person who is key to its operation dies.
An ongoing business can buy life insurance to furnish benefits for its employees.