A Holistic Study on Life Insurance

We have automobile insurance to protect the investment in our vehicle should it be damaged. We have health insurance to help cover the costs involved in keeping ourselves well, or in making us well again should we become ill.  We have homeowner’s insurance to pay for accidental damage done to the houses we own.  But, what about life insurance?  What does life insurance cover, and why should you have it?

All insurance offers the same thing:  Peace of mind.  But while health insurance protects the health of the policy holder, life insurance is for the policy holder’s family.  Life insurance protects your family in case you die.  It’s primary purpose is twofold:  It replaces income lost when a spouse or parent passes away, and it covers the cost of a funeral and burial or cremation.

Life insurance is extremely important for those families, particularly young families, who have not had the time or opportunity to develop a savings or investment portfolio that would sufficiently cover those expenses.  It serves as a stop-gap, taking up the slack left between savings in place and income lost.

However, as important as life insurance may be for peace of mind, it should not be regarded as something one needs to keep forever.  The purpose of life insurance is to protect the policy holder’s family in case of death by providing lost income.  If a family is sufficiently wealthy or has sufficient savings or investments to cover lost income, then there is no need for life insurance.

With this in mind, let’s look at the two main types of life insurance available:  Cash Value life insurance and Term life insurance.

A Term life insurance policy is designed to be temporary.  All of the premium paid by the policy holder goes to pay for the policy. Nothing is retained or held over, and once the need for the policy disappears it may be dropped without any penalty.  This insurance works much the same as automobile insurance.

Cash Value life insurance is typically more expensive than an equal amount of Term insurance.  This is because part of the premium goes to the policy itself, and part is put into a savings account.  The idea is that over time the savings will grow, so that when the policy holder dies and the benefit is paid to the family, there will be a substantial sum.

On the surface, a Cash Value insurance policy may appear to be the better choice.  However, in many instances the interest rate paid on the attached savings plan is not as good as what one may get through careful investing.  In this case, it is more sensible to purchase a less expensive Term life insurance policy and invest the difference.  There are a variety of options available to the careful investor, such as Roth IRAs.  Even in today’s soft economy, interest rate averages of 8% to 10% may be found.

Life insurance is not a top-priority for many Americans, but for a small monthly premium, a Term life insurance policy coupled with a sound investment plan can buy a family peace of mind for years to come.