By Scott Taylor, Family and Consumer Sciences Extension Agent, Hernando County, Florida
Reviewed by Martie Gillen, PhD, Department of Family, Youth, and Community Sciences, University of Florida
I had never given much thought to life insurance until the wife of a friend of mine passed away unexpectedly. He had to sell their house, as he could no longer afford the mortgage payment on just his salary. As if the personal loss was not enough, he now had to lose the “dream” he and his wife had built and shared for the previous 25 years.
Why Do I Need Life Insurance?
The main purpose of life insurance is to protect your family and provide for them if you should die unexpectedly. A specific amount of money is paid out to your beneficiaries (the people you name in your policy) upon your death.
We all hope the worst won’t ever happen. But if it does, life insurance money can be used to replace your lost wages and/or earning potential, fund your spouse’s retirement, pay for your children’s college educations, provide income for families, and many other purposes.
How Can Life Insurance Benefit my Long Term Financial Plan?
As we progress in our lives and careers, our collective assets and liabilities become more complex. We have our homes, cars, and savings for our children’s future education, just to name a few. What would happen if our income stream were to suddenly decrease due to the loss of one of the family’s breadwinners? Would the survivors be able to maintain the standard of living they are accustomed to? Or, would this already painful personal loss result in severe financial hardships and financial struggle? Maybe even the loss of a home or family business?
If you purchase a life insurance policy that provides a financial benefit large enough to cover outstanding financial obligations (such as a mortgage, car payments, and any other outstanding debts, such as joint credit cards or personal loans) all your survivors will have to be concerned with will be ongoing monthly expenses. Life insurance can also be another source for retirement income, as many policies (whole life) not only have a death benefit, but also have a cash value that can be used as part of a retirement income stream.
Types of Life Insurance Available
The two primary types of life insurance available are term life insurance and whole life insurance. Term life insurance is just that: pure insurance that covers the insured for a period of time. If death occurs during the insured period, the benefit is paid to the beneficiary(s) as agreed to in the contract.
Whole life (cash value) insurance is similar to term life insurance in that it covers the insured for an agreed-upon period of time. This is often for 20 to 30 years to cover the term of a mortgage, or similar large debt. However, there is also an investment element to this type of insurance; it builds cash value. If the agreed-upon insured period goes by without a claim, then the insured person can withdraw funds from the accrued savings from the investment once the debt is paid off, and use them as part of his or her retirement income strategy.
Life Insurance Terms Explained
When researching life insurance, it is always a good idea to be familiar with the most common terms, such as policy holder, beneficiary, term, and benefit amount.
The policy holder is basically who the policy is covering. The beneficiary is whom the benefit will be paid to in the event of the death of the policy holder. Term usually refers to the length of the insurance period (e.g., 20-year term, 30-year term, etc.). The benefit amount is the financial benefit that will be paid to the beneficiary.
Frequently Asked Questions
- How much life insurance should I buy?
- Which family members should have life insurance?
- What if we can’t afford it?
You’ll probably have important questions like these when buying life insurance, which is a very important part of your overall financial plan. Therefore, it is always recommended that you work with a licensed insurance professional in your state of residence when you buy life insurance.
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