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What Is Life Insurance?

What Is Life Insurance?

Insurance is used as a way of protecting against unexpected tragedy or accidents in everyday life. Much as car insurance is used in instances of auto accidents like fender benders and home insurance is used in cases of fire or burglary, life insurance is used in the case of untimely death to provide for family members who rely on your income to pay for living expenses. However, life insurance may not be appropriate in all circumstances or for all individuals and various factors should be considered when making a decision to purchase life insurance.

Life insurance is primarily used as a hedge to provide for those who rely on you financially and would be unable to provide for themselves without significant difficulty or relying on government assistance. A single person with no dependents and just getting started in life may not have an immediate need to purchase life insurance. Only when starting a family or when taking care of a loved one does a true need for life insurance become evident.

Life insurance can also be used as an investment vehicle and might be purchased by younger individuals as a means of saving for the future. There are many different types of investments and life insurance if chosen should only be part of an overall diversified investment portfolio. Being able to take a loan against a life insurance policy can be a significant benefit and my factor in the decision of using life insurance as an investment.

Purchasing life insurance can be a relatively easy process and usually requires certain health information such as a full health history, a physical exam, and possibly additional blood work. Health insurance companies assume certain risks when insuring individuals and therefore to determine coverage and premiums it's important for them to know your current state of health when the policy is created. Individuals with terminal illnesses such as cancer or HIV may find it impossible to purchase life insurance and even if they were able to purchase a policy that premium prices may be cost prohibitive.

Like any other insurance it is important to consider your current financial situation, goals, and plans for the future when determining if life insurance is necessary. A common rule of thumb is if you're buying a house purchase home insurance, if you're buying a car purchase car insurance, and if starting a family purchase life insurance. How much and what type the life insurance will depend on what you can afford and what your family needs.

Image by: David Goehring