Life insurance is a policy that provides funds to your beneficiaries in the event of your death. While there are many types of life insurance, the insurance offers you and your family peace of mind that your dependents will be provided for and not suffer financial hardship after your death. Life insurance policies vary in the amount each pays, but as a general rule, the higher the insured amount, the higher the insurance premium.
Function
Life insurance can pay for a number of expenses, including funeral costs, medical bills, estate taxes and outstanding debts. If you have children, life insurance often is used for a child's education. Finally, the funds are often used to provide a second income when the person's income is no longer able to be regularly incorporated.
Do I Need It?
Life insurance isn't for everyone. For those without dependents, a small savings account that could cover funeral expenses would likely be sufficient. But The Motley Fool suggests asking yourself the following questions. If you answer yes, then you could need life insurance: Could your family afford funeral expenses if you were to pass away? Is your spouse or other dependents counting on your paycheck to pay bills?
Protection Against Instability
In addition to providing a source of income for your dependents, purchasing a life insurance policy early in life can help protect against future insurability. For example, many life insurance policies require a physical or stated health conditions. If a person has chronic health conditions such as heart disease or high blood pressure, a life insurance company can refuse to insure a person or to raise premiums because of these preexisting conditions. By purchasing life insurance when a person technically doesn't need it or very early in life, the insurance can be advantageous (and less expensive) over time.
Provide an Additional Source of Income
One particular type of life insurance policy, whole life insurance features a savings component, which allows a person to experience returns from the policy. This means a life insurance policy not only provides a protective source of income should you pass away, it also affords the opportunity to earn money. These funds can potentially be withdrawn without penalty throughout the ownership of the life insurance policy, which offers the owner an added monetary benefit.
Benefits Beyond Income Replacement
People need life insurance because it has additional benefits outside of those when a person passes away. These include supporting a charitable interest--those wishing to support a charity even after their passing can list a philanthropic organization as the beneficiary of a life insurance policy. The same is true to provide for a person's business needs in the event of his passing. If a person is a partner in a business that relies on his contribution in order to continue, a life insurance policy can ensure the business will continue should a principle benefactor pass away.
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