Differentiating between needs and wants is already a ticklish issue. Is a car necessary? Once you could walk or learn how to use public transportation it may not be. However, given the improvements in transportation and communication, people are required to be a bit more mobile and travel longer distances. I’m sure quite a number of people consider a car a necessity for convenience at least. In a similar way, life insurance is a product that can be considered a necessity for the modern financial plan. Estate planning is becoming more relevant and women can have kids later in life. To have a financial plan that doesn’t include life insurance, you would have to be be a solemn risk-taker or clairvoyant.
Many people are aware that life insurance provides for the financial dependents of an insured upon the insured’s death. However, some people believe that paying for something that would not benefit them directly is wasteful. It may not be that such people are selfish, but that they consider not being around to witness the benefit of life insurance to be a factor as well. However, the reality is that life insurance is needed more often than not. Below are the conditions that precipitate the need for life insurance:
1) Financial dependents.
Particularly if these dependents are children, they would have few means of surviving comfortably if the breadwinner dies. Life insurance is known as love insurance for this reason. In the life insurance industry, we say that if you care about yourself, you’ll have health coverage and a proper retirement plan. If you care about your loved ones or even your favourite charity, you should acquire life insurance.
2) Mortgage protection
Even though there may be specific mortgage-protection plans, life insurance can serve this role as well. The mortgage balance actually forms a significant part of the calculation of life insurance needs. Some financial institutions may also accept a life insurance contract as security in event of death of the insured. Life insurance as mortgage protection would ensure that the family would still have a home in the event of the death of the insured.
3) Forced savings
I would not recommend life insurance plans as specific investment vehicles. For those who have trouble exercising discipline or saving money, cash-value life insurance plans are necessary to ensure family protection and forced savings. The obligatory nature of the life-insurance contract helps ensure that many people save money that they would have spent foolishly otherwise.
4) Business needs
Life insurance has a role in satisfying business needs. This could be in the form of key-person insurance or as a transaction-enabler in establishing business partnerships. As a business facilitator, life insurance can protect the business as a going-concern.
5) Estate planning
There are many people who wish to leave an inheritance or preserve their assets within their family. Life insurance can act as a buffer against estate taxes. So powerful is life insurance that it can create an estate by itself. Usually the total premium contributions fall significantly short of the sum assured, ensuring that there exists an estate in estate planning.
The concept of life insurance is a vital aspect of risk-management in financial planning. In the financial pyramid, life insurance is a vital protection product. However, this does not mean that it is absolutely necessary for everyone in every circumstance. Life insurance is not needed for those who have no financial dependents or just don’t care what happens to loved ones after their passing. Life insurance is certainly not needed for children and those who would not need it for any of the reasons highlighted above. In any event, circumstances could change – at a moment’s notice – to make life insurance a necessity. Therefore it remains a financial instrument that is better to have than have not; as part of a sound financial plan.