Life insurance is an important piece of financial planning basics, particularly for those who are working towards financial security and independence. Whether you are not quite sure what life insurance is, or you are just curious and want to learn more, the topics below may help you better understand life insurance and how it can be important to your specific situation.
What is Life Insurance?
Life insurance is a type of insurance policy where a person pays a fee, or premium, typically monthly, to a life insurance company in exchange for a death benefit. When the policyholder passes away, the life insurance company pays the death benefit to a beneficiary named by the insured individual.
The purpose of life insurance is to provide financial support to your loved ones after you pass away. The benefits paid to beneficiaries can help cover funeral costs, bills, mortgage payments, credit card debts, and other obligations. The support can help ease financial stress during a difficult time.
Who Needs Life Insurance?
While life insurance may not be a necessity for everyone, there are certain situations where having life insurance can be crucial.
- Married Couples – Life insurance can help provide financial security in case a partner unexpectedly passes. On top of being emotionally devastating, losing a spouse can also come with significant financial consequences, particularly if the surviving spouse relied on the income of the deceased. Life insurance can help cover expenses such as funeral costs, mortgage payments, and other bills, allowing the surviving spouse to grieve without the added stress of financial complications.
- Young Families – If you have young children, having life insurance is vital. Life is full of uncertainty, and on the chance that the main provider passes away unexpectedly, it can be financially devastating for the entire family. Even if both parents work, losing one income can still have a big impact on your family’s financial situation. Life insurance can help make sure the children are taken care of by covering their education, childcare, and other everyday expenses.
- Individuals with Debt – If you have significant debt, such as a mortgage or car loan, life insurance can be a significant help to your loved ones by providing them with funds to cover any shared debt. Without life insurance, your debts could diminish your assets, leaving little to nothing for your heirs.
- Leaving a Legacy – For those who wish to leave a legacy, life insurance can be the right tool to help reach this goal. It can help provide liquid, tax-free assets to heirs, charities, and beneficiaries that otherwise would not be available during life. It is one of the most tax-efficient ways to transfer wealth.
While these are some of the common scenarios where life insurance is most needed, it’s important to remember that everyone’s situation is unique. Consult with a Certified Financial Planner® or insurance provider to determine if you may need life insurance based on your specific circumstances.
Luke Brooks, CFP®, ChFC®, RICP®, is an Advisor at The Welch Group, LLC, specializing in providing fee-only investment management and financial advice to families of various backgrounds. Luke is a graduate of Columbia International University, is passionate about helping others achieve their financial dreams, and is a Certified Financial Planner®.
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