10 Key Reasons Why a Person Needs Life Insurance

Insurance is designed to protect a person and the family from disasters and financial burdens. There are many kinds of insurance of which, the basic and most important is considered to be life insurance. It provides for the dependents after your death.

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Key Reasons Why a Person Needs Life Insurance

Since there are certain financial commitments you need to meet throughout life and do contribute in some way to the family income, you need to provide something even in death—to secure the home, help the family meet expenses for a while, protect dependant parents, or secure the children or spouse.

Financial obligations could include funeral expenses, unsettled medical bills, mortgages, business commitments, meeting the college expenses of the children, and so on.

How much insurance a person needs would vary, depending on lifestyle, financial needs and sources of income, debts, and the number of dependents? An insurance adviser or agent would recommend that you take insurance that amounts to five to ten times your annual income. It is best to sit down with an expert and go through the reasons why you should consider insurance and what kind of insurance planning would benefit you.

As an important part of your financial plan insurance provides peace of mind for any uncertainties in life.

1. Life insurance correctly planned will on premature death provide funds to deal with monies due, mortgages, and living expenses. It offers protection to the family you leave behind and serves as a cash resource.
2. It secures your hard-earned estate on death by providing tax-free cash which can be utilized to pay estate and death duties and to tide over business and personal expenses.
3. Life insurance can have a savings or pension component that provides for you during retirement.
4. Some policies have riders like coverage of critical illness or term insurance for the children or spouse. There are certain rules regarding eligibility for riders which you will need to determine clearly.
5. Having a valid insurance policy is considered as financial asset that improves your credit rating when you need health insurance a home loan or a business loan.
6. In case of bankruptcy, the cash value as well as death benefits of an insurance policy are exempt from creditors.
7. Life insurance can be planned such that it will cover even your funeral expenses.
8. Term life insurance has double benefits, it protects and you can get your money back during strategic points in your life.
9. Insurance protects your business from financial loss or any liabilities in case a business partner dies.
10. It can contribute towards maintaining a family’s lifestyle when one contributing partner suddenly dies.

Insurance is vital to good financial planning and security but you would need to assess your personal risk and long-term commitments. Insurance stands a person in good stead throughout life and can be used in case of emergencies during a lifetime by requesting a withdrawal or loan.

A CPA Talks About Buying Life Insurance

Want some straight talk on what kind of life insurance you should buy--and how much life insurance you should buy? Bestselling author & CPA Stephen L. Nelson shares some tips.

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Not everyone needs life insurance. The first thing to do is make sure you need it. Life insurance is really meant for your family members or other dependents who rely on your earnings.

Why You Buy Life Insurance

You buy life insurance so that, if you die, your dependents can live the same kind of life they live now. Strictly speaking, then, life insurance is only a means of replacing your earnings in your absence. If you don’t have dependents (say, because you’re single) or you don’t have earnings (say, because you’re retired), you don’t need life insurance. Note that children rarely need life insurance because they almost never have dependents and other people don’t rely on their earnings.

Life Insurance Comes in Two Flavors

If you do need life insurance, you should know that it comes in two basic flavors: term insurance and cash-value insurance (also called “whole life” insurance). Ninety-nine times out of 100, what you want is term insurance.

Term Life is Simple to Buy and Understand

Term life insurance is simple, straightforward life insurance. You pay an annual premium, and if you die, a lump sum is paid to your beneficiaries. Term life insurance gets its name because you buy the insurance for a specific term, such as 5, 10, or 15 years (and sometimes longer). At the end of the term, you can renew your policy or get a different one. The big benefits of term insurance are that it’s cheap and it’s simple.

Cash Value is Trickier

The other flavor of life insurance is cash-value insurance. Many people are attracted to cash-value insurance because it supposedly lets them keep some of the premiums they pay over the years. After all, the reasoning goes, you pay for life insurance for 20, 30, or 40 years, so you might as well get some of the money back. With cash-value insurance, some of the premium money is kept in an account that is yours to keep or borrow against.

This sounds great. The only problem is that cash-value insurance usually isn’t a very good investment, even if you hold the policy for years and years. And it’s a terrible investment if you keep the policy for only a year or two. What’s more, to really analyze a cash-value insurance policy, you need to perform a very sophisticated financial analysis. And this is, in fact, the major problem with cash-value life insurance.

While perhaps a handful of good cash-value insurance policies are available, many— perhaps most—are terrible investments. And to tell the good from the bad, you need a computer and the financial skills to perform something called discounted cash-flow analysis. If you do think you need cash-value insurance, it probably makes sense to have a financial planner perform this analysis for you. Obviously, this financial planner should be a different person from the insurance agent selling you the policy.

What’s the bottom line? Cash-value insurance is much too complex a financial product for most people to deal with. Note, too, that any investment option that’s tax-deductible—such as a 401(k), a 401(b), a deductible IRA, a SEP/IRA, or a Keogh plan—is always a better investment than the investment portion of a cash-value policy. For these two reasons, I strongly encourage you to simplify your financial affairs and increase your net worth by sticking with tax-deductible investments.

If you do decide to follow my advice and choose a term life insurance policy, be sure that your policy is non-cancelable and renewable. You want a policy that cannot be canceled under any circumstances, including poor health. (You have no way of knowing what your health will be like ten years from now.) And you want to be able to renew the policy even if your health deteriorates. (You don’t want to go through a medical review each time a term is up and you need to renew.)