I’m pretty sure most people have a basic understanding that a Life Insurance Policy pays money to a named beneficiary (the person who gets the money) when someone dies. You’ll hear alot of people tell you that once you get married – it’s time to get life insurance, or once you have kids – it’s time to get life insurance. (and of course if you have a shotgun wedding then it’s really time to get life insurance! :) )
The reason they say that is because most people will want to provide for their loved ones (who may be financially dependent on them) if they die. For example, if you had a couple who are married with one young child and the wife is an investment banker and the husband is a stay-at-home parent (and the baby is just a food processor, really) perhaps they have a household income of $100,000 after tax. But if the wife dies, then that would cause a lot of problems. Most people would like to avoid the hassle of making huge life changes IN ADDITION to having to deal with the death of a loved one.
Enter the life insurance policy… a policy would be purchased that would provide a death benefit large enough to allow the remaining family to continue with their lives with as minimal disruption as possible to their living situation. Of course, any time a member of the family dies that is almost impossible to do…
Ah, but this is only one use of life insurance and one type of life insurance we have described. Alot of people will use Life Insurance as a means to create an estate to leave to their heirs or as a means of tax sheltering money beyond what they are allowed to in various different types of tax-sheltered investment accounts… but we need to explore the industry of life insurance much more before we tackle these concepts and strategies… Stay tuned!