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6 Reasons Why You Should Buy Life Insurance

By Michael Lewis

life insuranceFor many people, their first experience with life insurance is when a friend or acquaintance gets an insurance license. In my case, a college friend, recently hired by a major insurance company, contacted me (along with all of his other friends) to buy a $10,000 policy underwritten by his company.

Unfortunately, however, this is how most people acquire life insurance – they don’t buy it, it is sold to them. But is life insurance something that you truly need, or is it merely an inconvenience shoved under your nose by a salesperson? While it may seem like the latter is true, there are actually many reasons why you should purchase life insurance.

Reasons to Buy Life Insurance

As I grew older, got married, started a family, and began a business, I realized that life insurance was indispensable and fundamental to a sound financial plan. Over the years, life insurance has given me peace of mind knowing that money would be available to protect my family and estate in a number of ways, including:

1. To Pay Final Expenses
The cost of a funeral and burial can easily run into the tens of thousands of dollars, and I don’t want my wife, parents, or children to suffer financially in addition to emotionally at my death.

2. To Cover Children’s Expenses
Like most fathers, I want to be sure my kids are well taken care of and can afford a quality college education. For this reason, additional coverage is absolutely essential while my kids are still at home.

3. To Replace the Spouse’s Income
If my wife had passed away while the kids were young, I would’ve needed to replace her income, which was essential to our lifestyle. I also would’ve needed to hire help for domestic tasks we’d shared like cleaning the house, laundry, cooking, helping with schoolwork, and carting kids to doctor’s visits.

4. To Pay Off Debts
In addition to providing income to cover everyday living expenses, my family would need insurance to cover debts like the mortgage so they wouldn’t have to sell the house to stay solvent.

5. To Buy a Business Partner’s Shares
Since I’m involved in a business partnership, I need insurance on my partner’s life. The reason is so if he dies, I will have enough cash to buy his interest from his heirs and pay his share of the company’s obligations without having to sell the company itself. He has the same needs (due to the risk that I might die), and he simultaneously purchased insurance on my life.

6. To Pay Off Estate Taxes
Estate taxes can be steep, so having insurance in place to pay them is essential to avoid jeopardizing assets or funds built for retirement. Use of insurance for this purpose is most common in large estates, and uses permanent (rather than term) insurance to ensure that coverage remains until the end of life.

life insurance senior couple

How Much Coverage Should I Buy?

The face amount, or “death benefit” of an insurance policy (i.e., the amount of proceeds paid to the beneficiary) should be high enough to replace the after-tax income you would have earned had you lived a full life, presuming you can afford the annual premiums for that amount. In other words, the insurance replaces the income you didn’t have the chance to earn by living and working until retirement due to a premature death.

The proper amount of insurance allows your family to continue their lifestyle, even though your income is no longer available. The actual amount that you should purchase depends upon your present and probable future incomes, any special circumstances affecting you or your family, and your existing budget for premiums.

Whole Life or Term?

Some people prefer to drive Cadillacs or Mercedes, which come with all of the electronic gadgets that make driving safe and as easy as possible. Others prefer less customized makes, equally reliable to their more expensive cousins, but requiring more hands-on attention.

Whole life is the “Cadillac” of insurance; its sponsors try to do everything for you, specifically investing a portion of your premiums so that the annual cost doesn’t increase as you grow older. The investment characteristic of the insurance means that premiums are generally higher than a similar term policy with the same face value. After all, whole life insurance is intended to cover your whole life.

Term insurance, on the other hand, is a stripped-down model of life insurance. There are no excess premiums to be invested, and no promises or guarantees beyond the end of the term, which can range from 1 to 30 years. The annual premium for term insurance is always less than whole life, lacking the investment component, but your premiums will rise (often substantially) once the term period expires.

Both types of life insurance policies (or one of their derivatives) have benefits and drawbacks; both have their place depending upon the needs, desires, and financial objectives of the purchaser. A knowledgeable professional insurance agent can help you decide which type of policy is best for you depending upon your circumstances. But whichever you select, be sure that you have enough coverage to meet your objectives in the short term and the long term. During my lifetime, I have spent thousands of dollars in premiums for life insurance of both types and I have never regretted a single penny of the expense.

Final Word

Some people mistakenly believe that life insurance is a scam. This is due to the fact that the money for premiums is lost if death doesn’t occur during the coverage period (in the case of term insurance), or because many people live to a ripe old age and continue to pay their permanent insurance premiums. Such naysayers compare life insurance protection to gambling, and forgo the protection entirely.

Of course, there is no bet – you will die, but no one knows when. It could be today, tomorrow, or 50 years into the future, but it will happen eventually. Life insurance protects your heirs from the unknowable and helps them through an otherwise difficult time of loss.

Do you have life insurance? Why or why not?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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  • http://www.ontargetcoach.com/ Brent Pittman

    That is interesting about buying the business partners shares? I was under the impression that his heirs would inherit the business or do you have it set up that the partner has 1st dibs over the family?

    • Michaellewis

      While I am not an attorney and avoid giving legal advice, the disposition of ownership interest would depend upon the written agreement between the owners, commonly referred to as “a buy-sell” agreement that can be triggered at the death of one of the owners. If there is no agreement, the property would be handled as an asset of the deceased’s estate.
      Funding of the purchase price is separate from the agreement itself. You can own an insurance policy on another person provided you have an “insurable interest”. Essentially, this means you can own a policy if the person’s death would have a negative financial impact upon you. Of course, the person being insured must agree to your ownership.
      If you find yourself in this position as a partial owner of a business, it’s probably time to see a local corporate attorney who can guide you in making proper decisions.

      • http://www.ontargetcoach.com/ Brent Pittman

        Michael, thanks for clearing that up. Never hard of buy/sell agreement, I can that would come in handy, along with insurance.

  • http://www.moneylicious.org/ Ornella @ Moneylicious

    This was a fantastic write up. I especially like point #5. Newly business partner can easily overlook this key point. Thoroughly enjoyed it.

    • Michaellewis

      Thank you. A funded buy-sell agreement should be a part of every business ownership arrangement. While I’ve never had a partner die, it’s been a comfort knowing that the business could go forward without major disruption.

  • http://thechicagofinancialplanner.com/ Roger Wohlner

    Great post. You are right in the life insurance often gets a bad rap. In fact life insurance is a key element in the financial planning of most of my clients. The issue becomes (as you also state) how it is purchased. The amount and type of life insurance that is right for a particular situation should ideally be determined in the context of one’s overall financial plan.

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