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What Is Life Insurance

What is life insurance?
Life insurance is an agreement between you and an insurer. When you die, the insurer agrees to pay a certain sum to your named beneficiary in exchange for premium payments made by you.

Why Would You Need Life Insurance?
The most common reason for buying life insurance is to replace the income lost when you die. For example, say that you work, and that your income is used to  your family. When you die, and your paychecks stop, the life insurance proceeds can be used to continue to support your beneficiaries.

Another common use of life insurance proceeds is to pay off any outstanding debts you may have. For example, mortgages, car loans, medical bills, and credit card debts are often left unpaid when someone dies. These debts must be paid from your assets.  Life insurance can be used to pay off these debts.

Life insurance provides liquidity to your estate. When you die, you may leave some liquid assets (such as cash, CDs, and savings bonds), and some illiquid assets (such as real estate, an automobile, and stocks). Your liquid assets may not be enough to pay all the debts that you leave behind, plus all the expenses that arise because of your death (such as funeral expenses and estate taxes). Your illiquid assets may have to be sold in order to meet these obligations when they come due. This may cause a financial loss if the assets must be sold undervalue in order to get the money on time. You can use the proceeds of your life insurance policy because these funds are liquid and general received by the beneficiary very quickly. 

Life insurance is a great way to give to charity when you die. You may have always had a great philanthropic desire, but not the means to make it a reality. Life insurance can do that for you.

Life insurance can be a critical component for specialized business applications, such as funding a buy-sell agreement. Under a buy-sell agreement, life insurance can be used to provide cash for the purchase of a deceased owner's interest in the business. 

Finally, life insurance can be an investment vehicle.  Some types of life insurance policies may actually make money for you, as well as provide the benefits described above.  This can help you with long-term financial goals.

 

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