Life insurance, yuk! Who wants to talk about life insurance? Generally, nobody but a life insurance agent. However, life insurance exists for a good reason or two. And, the first question you need to answer when contemplating life insurance is, “Why do I need to buy life insurance?”

There is one underlying reason for anyone to own life insurance: If you die before you have been able to meet your desired financial goals for your family, the insurance proceeds will create an instantaneous estate for the use of those whom you love and care about after you are gone. This doesn’t say anything about what kind of life insurance you should buy, but it says why you want to buy it. The goals for life insurance proceeds may include paying off the mortgage so your family can live in the current home, providing sufficient income so the surviving spouse can stay at home or work part time while raising the children to adulthood, paying for the dreamed of college education and generally bringing peace of mind in regard to financial needs and maintaining an adequate life style.

If you have no one who depends on you for financial support (spouse, kids, parents, etc.), then you have little reason to own life insurance. You might want to have just enough so whoever is going to have to take care of your final details will have adequate funds. There may be significant final medical expenses, not to speak of funerl arrangements, that could be problematic if you don’t have a fair estate outside of insurance.

The second major reason for owning life insurance is for business purposes. If you own a business or are a partner in a business, one contingency that should be considered is what would happen to the business of you were to die “prematurely”? What is prematurely? Sooner than you have planned for. This really works in essentially the same way as for family insurance but the direct beneficiary is the business.

• Partnerships: When one partner dies prematurely, it usually means the surviving partner either has a new partner (the surviving spouse) or he is in a position to buy out the half that belonged to his now dead partner. If the partnership is flush with cash, that may not be a problem. But if the business is like most, paying off a deceased partner’s spouse would be a real set back and could mean the end of the business.
• Corporations: This is very similar only here either the other shareholders or the corporation is buying back the shares of the deceased shareholder.
• Estates: A third reason for life insurance is to provide liquidity to pay Estate Taxes without having to liquidate the “familly farm” or whatever assets the family won’t want to have to sell in order to pay the Estate Taxes.

Each of these “reasons” for owning life insurance have different technicalities about how to properly set up beneficiary designations and ownership and a good life insurance agent should be well trained in those technicalities. In the case of business and estate planning, you should also consult with an appropriate attorney and/or accountant.

Bottom Line: The bottom line of the WHY of life insurance is it is a risk management tool to mitigate the risk of negative consequences resulting from death. The real WHY of life insurance has nothing to do with the build up of cash value inside a policy. It all has to do with the death benefit. Keep this in mind whenever talking to an insurance salesman.

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“Investor Education for Main Street America”

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"Investor Education for Main Street America"