Life insurance content: “What are the reasons families purchase life insurance?”

I continue to work on a digital insurance strategy to market and implement life insurance solutions. I wrote this post about, “What are the reasons families purchase life insurance?” Enjoy!

There are many specific reasons why people buy life insurance:  the purchase of a new home, the birth of a new child, and the establishment of a new business partnership are all examples of changes which may cause a person to reconsider the amount and type of life insurance covering inforce.  I was contemplating how to best articulate the planning process a family might use to support decision making about life insurance purchases and opened up my 2007 Chartered Life Underwriter (CLU) text from The American College:  Fundamentals of Insurance Planning.

“Life insurance planning includes determining both how much and what types of insurance is needed.  The first of these tasks is usually based on an analysis of the client’s needs.  The second task begins with a decision between temporary versus permanent coverage and proceeds to the selection of a particular type of policy.”

The text offers various methods by which to determine an appropriate amount of insurance:  multiple of income, financial needs, and capital needs.  I always found the best of these to be a financial needs analysis, contemplating cash needs (e.g. attorney/probate expense, funeral costs, and an emergency fund) as well as ongoing income needs (i.e. ongoing support adjusted for time and critical future events, such as children no longer requiring support) and other items (e.g. paying off a mortgage, education expense for children, and charitable giving goals.)

There are also various types of insurance.  Some, such as 10-Year Level Term, will have the benefit of relatively low and predictable premium costs, but limit the term of coverage to a decade, which may not be suitable if the family has young children (and the need for life insurance is likely to extend beyond that period.  Alternatively, an Ordinary Life (whole-life) policy has the benefit of living benefits and guaranteed coverage for the life of the insured, but the premium outlays are relatively high, which may not be worthwhile, especially if the need for insurance will decline steeply as children approach age 18.

The financial protection created for a family through the purchase of life insurance is important and worthy of reconsideration periodically.  A family should, at a minimum, set aside time at least annually to compare their financial goals against assets, liabilities (including existing life insurance) and determine whether adjustments to the insurance policies are warranted.

The topic at hand in a life insurance purchase (i.e. our own mortality) is not, by its nature, a pleasant topic on which to reflect.  But, the certainty afforded by good planning makes the topic important, especially in the case when an insured dies.  Life insurance has an important role in most families' insurance and financial portfolios.