Powered By Blogger

Tuesday 4 December 2012

Why a person need life insurance

Most people recognize that if they die from a cause other than old age, their death could have negative economic consequences for others.  Although there’s no way to replace the personal value of a life, life insurance does serve as a way to provide for our loved ones and/or pay our debts after we die.
I can think of at least six reasons that a person might need life insurance:


To replace one’s ability to earn income 
If your income is needed to support family members (particularly minor children), your death causes an economic shortfall.  Unless your family has significant surplus financial resources and/or other extended family can provide support, you probably need some life insurance. 

    To replace one’s ability to care for others 
If you’re involved in the daily care of a household, your contributions have an economic value and your death would cause an immediate need for replacement care.  Again, the presence of young children in a household means that the loss of a caregiver (usually a mother) has economic consequences.  If the Mom Salary Wizard at Salary.com is correct, a stay-at-home mom with two school-age children does work with a salary value ranging from $64K to 174K, depending on where the family lives.  Alternatively, if you’re responsible for the care of an elderly relative or an older child with special needs, life insurance could be needed to provide continued care in the event of your death.

  To pay for expenses arising as a result of death 
This could include anything from the cost of burial to the payment of estate taxes or the repayment of your debts.

   To provide for special business needs 
If your contribution is critical to the success of a business (especially a small business), there would be serious consequences if you die suddenly.  Banks sometimes require life insurance on a key person in a business as a condition of extending business credit.  Life insurance may be needed to enable the business to survive the transition when a principal dies, or there may be a need for ready cash to enable the remaining partners in a business to buy out the heirs of a deceased partner.

   To fund a charitable interest 
If you desire to support a charity, life insurance can be a way to make gradual payments that eventually result in the provision of a significant charitable gift.

     To provide supplemental income later in life 
Some types of insurance policies are considered permanent insurance (in contrast with term insurance, which has a specified duration).  Such policies, in addition to providing for a death settlement, have a cash value which can be used in various ways.  In some instances it may make sense to fund a policy so that it contains an excess of cash value that can subsequently be withdrawn or borrowed during retirement.  Using an insurance policy for this goal requires particularly careful planning.  This use of insurance will not apply to most people, since there are several other tax-advantaged ways to provide  for retirement income.

It should also be evident that buying life insurance requires an analysis of a household’s total financial situation in order to determine the amount of insurance needed.  It’s wasteful to buy more than you need.  If your goal is to replace lost income, you need to estimate the actual economic impact of a death rather than buying what sounds like a good number or using a “rule of thumb.” $500,000 of coverage might be a lot more life insurance than you need, or it might be far short of being sufficient






No comments:

Post a Comment