Why Life Insurance?
by David W. Crump
With a draft on our family checking account once a month, I am reminded that life insurance costs money. Why spend this money and what is it providing? With many families having stretched budgets, these are valid questions.
How Does Life Insurance Protect You?
Like all insurance products, life insurance is about paying money to shift risk. The risk involved with life insurance contracts is protection from financial loss due to premature death.
Humanity is more than the sum of its individuals. Important relationships between people such as parents raising children, married couples, grown children with elderly parents, business partners, etc are examples. None of us are apart from our social relationships. These relationships are a core strength and substance of our society.
You can’t ever replace the loss of a parent, spouse or other significant person in your life. Life insurance can only help with the financial component.
Each of us started out as a “bundle of joy” and wholly dependent on our mom and dad. Protecting a young family’s income during the child raising years has been a classic reason for life insurance and still is a very important goal.
In the traditional setting of a mother staying at home to nurture the young offspring, the whole family is dependent on the father’s income. However, don’t forget the financially critical childcare and house management role of the homemaker. In many young families, both husband and wife provide significant income to the household and share childcare duties. Protection for both parents is crucial in both situations.
The estimated cost of raising a child in our modern America is enormous. An estimate by the USDA sets a median cost in excess of $200,000 to age 18. Beyond the “Legal Age” threshold awaits the added expensive of a college education for many sons and daughters and its skyrocketing costs. More children are staying in the nest longer and are dependent on some parental help well into adulthood.
When discussing protection for a young family, I normally thinking of coverage for the income until the youngest child is age 23 and $100,000 or more per child of protection for each parent. My goal is to have at least a “starter” plan that would have significant help, yet still stay affordable.
With our greatest generation living longer healthier lives, many middle aged “baby boomer” sons and daughters have elderly parents to care for. Having our older generation live longer ads depth to our families and is an enormous social value. I am lucky to have both of my parents, now age 85 and 88 who, in spite of health challenges, are living independently.
Sometimes helping our parents includes planning for final expenses. Life policies can be an effective financial tool to handle this need.
Generational transitions may also have an important financial component. A life policy can also be an effective when used as an estate planning tool to pay tax liabilities and probate costs. Insurance settlements have tax advantages that make them particularly attractive for larger estates.
When a couple, or partners, buy a house together or commit to some other large financial obligation, they become economic partners. They become dependent on each other for the contribution toward the loan payment and the income needed to maintain their joint household. This risk can be offset with sensible protection for each other. This is particularly important for unmarried partners since the surviving partner does not have the inheritance rights of a widowed spouse.
I practice and preach the idea of buying life insurance on kids. It is a way to pay an extremely small cost now to provide for the child’s future life insurance needs. Because I purchased plans for each of my three sons, they will have their life insurance already in place to protect their wives and my grandchildren. I look at the modest cost as a way of passing forward to my sons — an important financial gift.
Life insurance is about relationships. Your money is well spent protecting those who depend on you.
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David W. Crump, Ross Gray Insurance Agency