A variety of life insurance policies exist. I’m not going to discuss the various types that are out there. For my purposes here, when I refer to life insurance, I will be referring to term life insurance (the most basic and inexpensive and probably the most appropriate for most people).
Risks are all around us. We encounter risk the minute we wake up in the morning and get out of bed to the moment we retire in the evening. To be honest, we technically face risks around the clock. We hedge those risks by purchasing insurance. We pay annual premiums to protect our homes, our autos, our health and our finances. While many of us begrudge insurers and rising premiums (I certainly do!), insurance is a necessary part of our lives that helps to prevent financial ruin.
Life insurance is one of those types of insurance where some people question whether they actually need it. It’s just another expense for something I’m not going to need that continues to enrich the insurance companies. Additionally, nobody likes to think about dying, especially dying prematurely and leaving a young family behind. However, incidents like these occur and require us to at least consider the risk of a premature death. The life insurance reality is if anyone relies on you financially, you need life insurance. The basic protection life insurance provides is income replacement. If you’re the breadwinner in your family, what happens if you were to pass away suddenly and unexpectedly? How will your family members/dependents be provided for in your absence? In the end, you buy life insurance because you love someone else, and you care about their well-being.
Determining the right amount of life insurance is somewhat of a balancing act. You want your family to maintain their standard of living in your absence, but you need to balance the cost to do so with your current financial reality. Ideally, you purchase enough life insurance to make up for any shortfall in replacing your income, loss of retirement savings, annual living costs, potential college costs and other expenditures you planned on covering. Figuring this out on your own is possible but is somewhat complicated for the average layperson. The multiple step practice of taking into account future values, inflation expectations and the discounting of cash flows can be daunting and confusing. Working with someone who knows what they’re doing is usually the best option. As a side note, I am NOT an insurance professional. I help my clients evaluate their insurance needs versus their current insurance policies to determine if they’re properly hedging the risks they face.