Life Insurance

INTRODUCTIONLife insurance is a unique product. Like other insurance products, its primary purpose is to protect against loss. But unlike other kinds of insurance products, life insurance isn’t for you; it’s for your survivors. Life insurance has no uncertainties; if you’re covered by a life insurance policy — andthe company holding the policy has the resources to pay — you can pretty much bet that someday your survivors will receive a benefit. Knowing how much life insurance coverage to buy isn’t an easy decision; evaluating a car or a house is fairly simple, but how do you figure the value of your life?.
CHAPTER 1HOW LIFE INSURANCE DIFFERS FROM OTHER TYPES OF INSURANCE
 Dispelling life insurance myths Looking at the purposes of life insuranceLife insurance is simple, right? You buy a policy to protect your family, you die, your family gets some money. Simple. Direct. Easy. Not so fast. Life insurance is much more complicated than that. This chapter describes some of the myths that surround life insurance and takes a look at the main purposes of having a life insurance policy — not just as income for your survivors, but also as part of your investment portfolio, as a tax shelter, and as part of your estate planning. Myths about Life Insurance The following sections work to dispel the three main myths about life insurance.
Myth 1: I only need life insurance if I have kids Most people think that they need life insurance only if they have a family — to ensure that their survivors aren’t left hanging if they die prematurely.Life insurance is important for several other reasons, which you can read about in greater detail later in this chapter. Briefly, these other purposes are income replacement for a spouse to help him or her through a difficult adjustment period, as an investment, as a tax shelter, and as an estate planning tool.
Myth 2: Life insurance is a bad investmentLife insurance may not be the most profitable investment you can make with your money, but rarely is it a bad one. If you measure an investment only in how much you get in return, life insurance may or may not be a good investment. When you buy a life insurance policy, you put money into an account that will pay your survivors that same money, a portion of that money, or that money plus more when you die. If your survivors get more than you put in (or more than what the money could have earned elsewhere), life insurance is a good investment. If your survivors get less, it isn’t such a good investment. However, life insurance is much more than return on investment. Life insurance provides
 Protection for your dependents Peace of mind for you
If you’re looking for a pure return on capital, you can find many more lucrative investments — even tax-deferred or taxfree options — that can yield considerably more than your life insurance policy. But the primary function of insurance is not as an investment but as protection. No other investmentcan offer the same amount of protection. 4 CliffsNotes Understanding Life Insurance
Myth 3: Life insurance is unnecessary for older peopleNot very long ago, older meant “over 50.” But many people need life insurance at 50, 55, 60, or 65. Age is not always a reason to abandon life insurance. Even so-called “older” people may need income protection for their survivors if these heads of household or primary caregivers die prematurely. Peoplein their 50s and 60s (and sometimes into their 70s) are in their peak earnings years and have family responsibilities. You may want to give your loved ones the time to adjust to your death without having to change their normal standards of living. Today, many more people in their 50s and 60s are still supporting young children. If a woman has a child when she’s 40 or 42, for example, that child won’t finish college until Mom’s at least 62. Or suppose you have a non-working spouse and you die at the age of 60; he or she may not be able to find a job that brings in a comparable income to maintain the same standard of living. Many older people actually need more life insurance for a number of reasons: You may have less time to make up for the loss of income. You may find that inflation has cut into the value of the life insurance benefit. You have a greater need for estate planning as you get older because you have less time to carry out your plan. You have a greater need for tax planning as you age because you’ll most likely earn more, and life insurance can play a significant part in your tax planning.