Is Life Insurance Worth the Investment?

The purpose of life insurance is to provide a source of income, in case of death, for spouses, children, dependents or any beneficiary designated by the policyholder.  Life insurance plays a key role in effective financial planning and can also serve certain estate planning purposes.

Life insurance is needed in the event that others would continue to benefit from the income of the deceased.  If a spouse, child, parent or other individual needs the income to pay for basic living expenses such as mortgage payments, school tuition or the cost of retirement, life insurance is not only a good idea but an essential strategy for taking care of loved ones.

It is important to maintain the correct amount of life insurance to ensure that those we leave behind will be left with appropriate income to cover living expenses over a suitable horizon of time.  Unfortunately, most people do not understand how to make this calculation and consequently tend not to carry the right amount of life insurance.

There are two basic types of life insurance: term and permanent.

  • Term insurance covers a specified period. If the policyholder dies within a certain time frame the beneficiary receives the insurance benefit. Term policy premiums usually increase with age.
  • Permanent insurance (e.g. universal life, variable life, and whole life) contains a cash value account or an investment element to the insurance.
  • The younger your children, the more insurance you may require.
  • If both spouses earn income, then both spouses should be insured with amounts proportionate to salary amounts.
  • If the family cannot afford to insure both wage earners the primary wage earner should be insured first and the secondary wage earner later on. A less expensive term policy might be used to fill an insurance gap.
  • If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.
  • If there are no dependents and your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.
  • At a minimum, you will want to provide for burial expenses and paying off debt.
  • If your spouse would undergo financial hardship without your income or if you do not have adequate savings you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.

Important Guidelines Simplified

A well-grounded financial plan requires the appropriate types and amounts of insurance.  We strongly recommend an annual review of insurance policies as we grow older and circumstances change.  If you have questions call me directly at 408.357.7780.