Life Insurance – Part 1 – How It Should Be Used For A New Family

• IRON100
• February 28th, 2010

I may about to be stepping into a pit of alligators as I discuss this topic, but I think it is a topic that needs to be discussed. From my perspective, I believe that life insurance is not an investment but a necessary expense designed to protect family, personal, or business assets in case the death of a key income generating individual within that family dies. For the purposes of this series, I am going to focus in life insurance for families, and not, unless it is critical to discussion, speak about life insurance for business owners, though at some point in the future, I can tackle that a little more directly.

As a family begins its life, or as an individual takes on more responsibility and has family interests (business, relational as with parents or dependents, or charitable, as in with foundations or simply protection of assets so that the assets could be donated to charity), the need for insurance is typically greater in the beginning of its life. As the family earns more and builds wealth, that expense is no longer needed, expect for cases when business interests must be protected should a key individual within that business dies.

When one starts out in life, one has few assets (unless one is born into wealth or does something improbable like win a huge lottery) and likely has debt obligations like student loans, a home mortgage, the routine home expenses, the expense of child rearing, and college savings to cover through a savings plan (529 plan, Coverdell plan, or other approved vehicle).

Income must be replaced if that key family income earner (likely mother, father, or both) to cover those expenses. As wealth builds and income increases (assuming a regular habit of savings continues) the primary earners can pay for their expenses, including retirement (with burial or funeral expenses thereafter) and the insurance, outside of estate planning purposes, is no longer needed for the most part.

It is my contention that one should keep these insurance costs to the lowest possible level consistent with the need to cover these assets, and then to save and invest the rest. In the early adult stages of life, one has sufficient time to invest for a long enough period of time to do better than a fixed rate of return offered by other insurance vehicles like whole life or even the variable returns variable life policies.

What I will do (in far more detail in the next few series), is to define those types of insurance and why one should use them. I openly ask anyone who is involved in this industry to comment on these posts if you have an alternative point of view regarding what I will post.

One of the things one must realize, before I close this shorter than average post, is that each state in the United States regulates insurance activities in that particular state.  Though most policies are pretty uniform, there can be minor differences in policy coverage between the individual states. Though I may not (and probably cannot, given the limits of time) each difference, it is always best to check with one's local insurer and state insurance commission if one has questions regarding policy coverage.

I will provide another post in this series on Wednesday.

Tickers: child rearing expenses. college savings, estate planning, life insurance, limited expense, necessary expense, replacement of earner's income, term life insurance, whole life insurance

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