Its Purpose

A lot of people who purchase life insurance do not realize what the financial product was designed to accomplish in the grand scheme of their financial plan. They simply know that it protects their loved ones should they die prematurely with a onetime payout of money. But, life insurance is much more than just that. Life insurance is protection against the loss of an income that your family depends on. Your family needs you to provide for it in the form of your salary that you earn at your job. Should you die, your salary goes away along with everything that you pay for with it. Insurance is all about transferring the risk of a loss. The risk shifts from the individual to the insurance company. When we pay a premium, the life insurance company begins to accept the risk.

A lot of people misunderstand the true purpose of owning a life insurance policy on the life of a loved one. Many purchase a life insurance policy on someone that has no source of income because they do not realize that life insurance should primarily be used for the replacement of lost income due to someone’s death. If there is no one depending on that person for money or financial support, there is almost always no need for that person to have life insurance. Children are the classic example where parents purchase life insurance and there is no need. Another example, is an elderly couple that has life insurance but no debts, no heirs depending on them, and no need for a cash payment on their death. They essentially self-insure themselves with their nest egg. Becoming self insured or financially independent without the need for life insurance is the ultimate goal of most financial planners and what everyone should strive for. You do not have a need for life insurance most days as you age and enter the golden years of your life. Life insurance is meant to replace income, pure and simple, in almost every case. In only a few other instances are life insurance used for some other purpose such as giving to charity, leaving a legacy, and other ventures. Understanding the key reason behind the use of life insurance in financial planning can help people save money and not spend it needlessly.