Why Do We Need Life Insurance?

Life insurance is essential to make sure that the people you care about are financially protected in the event of a tragedy. A life insurance policy is a contract where the insurer pays the named beneficiaries in exchange for a premium, reassuring them that they will not have financial problems after your unexpected passing. 

Although most people understand the importance of having financial protection for dependents, many are reluctant to do so. One possible reason could be that it is uncomfortable to make or think about plans after your death. It's also possible that some people skip it because the main benefit of life insurance is not immediately noticeable. However, even if life insurance is not tangible, it offers several valuable benefits.

Benefits of Life Insurance

As mentioned earlier, the main benefit of life insurance is that it provides financial security for your loved ones. So, they do not have to worry about mortgage payments or other living expenses needed to maintain their standard of living and can even provide funds for their children's education. Of course, since life insurance is not free, you will need to determine the size of the life insurance policy to cover these payments so that you do not buy more than is necessary. A simple way to determine the amount of life insurance is to use a multiple of your annual income. It is recommended to have a life insurance policy equal to five to ten times your yearly income. You should note that this is a very rough method that ignores your family's financial obligations and additional sources of revenue. A better approach would be a detailed analysis that calculates the difference between all of your family's economic needs and the financial resources available to them.

A life insurance policy can be designed to protect against creditors if you have financial problems. Creditors cannot claim the proceeds paid out to beneficiaries based on your financial obligations with such life insurance policies.

Life insurance payouts are generally not subject to income tax. Life insurance is encouraged in these economies through tax benefits.

In addition to the death benefit, some life insurance policies accumulate cash value and serve as a savings account. The savings can be used if the policyholder needs to cover some expenses. Life insurance policies with cash value are more expensive than those without a savings component.

Some policies have a cash value that accumulates over time2 and can be used to pay premiums later or even tapped for living expenses in retirement3.

A policyholder's expectations for life insurance may change as their life changes. For example, as you grow older, the life insurance premium would increase, while the need for life insurance would cease when your children grow up and start earning their income. You can choose a life insurance policy from many different alternatives with different features and premium amounts depending on your needs.

Dr. Genco Fas

References:

Lawrence J. Gitman, Michael D. Joehnk, Randall S. Billingsley, (2011) Personal Financial Planning, South-Western Cengage, 12th Edition 

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