Why We Need Life Insurance?

Life insurance plays an important role in securing the finances of many families. In the purest sense, life insurance is something that protects against the risk of you dying too soon. It pays a death benefit to someone when you die. Your premature death would expose your family or business to certain financial risks, such as:

• burial expenses;
• paying off debts;
• loss of family income;
• loss of business profits;
• paying estate taxes; and
• a lack of or a limited college fund for your children.

If you don’t have dependents, you probably don’t need life insurance. But if you have a spouse, children or elderly parents who rely on your income, you’ll want life insurance to pay expenses for them in the event of your premature death. You also may even want to consider insuring the life of your spouse if he or she is not earning money—particularly if he or she cares for your children. (If your spouse were to die unexpectedly, not only would you have funeral expenses, but you’d have to start paying for child care).

Life insurance guarantees a specific sum of money will be available at exactly the time it is needed. Savings accounts, mutual funds, stocks, bonds and other investments do not offer such protection—and, in fact, they can be tied up in probate at the time of your death. Life insurance, however, will be available immediately—and it creates, in essence, an estate that did not previously exist.

With life insurance, you get what you pay for. You pay the policy’s face amount—the amount the life insurance company will pay when you die.

Since this amount is payable upon the death of the insured, the element of risk to the insurance company is much different than it is for an automobile or homeowners policy.

When an insurance company issues an auto policy, for example, it hopes you will be a safe driver, never have an accident and never file a claim. When an insurance company issues a life policy, it knows it will be called upon to pay a claim someday—because everyone dies. The only unknown is whether the claim will be made in one year or in 50.

This is why, not surprisingly, life insurance costs vary based on your age, health and the amount of insurance you buy.