When to Consider Life Insurance

In economic terms, life insurance is a contract between a policy owner and an insurance company to pay a cash death benefit when the insured dies. In human terms, a life insurance policy represents a promise to take care of survivors, whether they are family members or business partners. People at all stages of life have reasons to consider purchasing life insurance.

1. Marriage

   • Many people purchase life insurance to protect their spouse if something happens to them. A life insurance policy can provide a cash death benefit large enough to provide for a spouse for several years -- replacing a breadwinner's income, or providing a surviving spouse with enough money to keep up with house payments or to hire someone to help take care of children. Some policies give the policy owner the right to buy more insurance every few years or when children come into the family.

   Starting a Business

   • Life insurance can protect surviving business partners. If a partner in a business dies, and that partner is integral to running the business, the other partners, employees and their families may suffer severe economic harm. Life insurance can provide enough money to see the business through the turmoil caused by a partner's death, while the company retrains workers or recruits and hires a replacement. Life insurance can also help ensure that the surviving shareholders have enough cash on hand to purchase the ownership interest of a surviving heir who has no interest in running the business or brings no expertise to the table.

   For the Children

   • Many families purchase permanent life insurance policies, such as universal life or whole life policies, on children. While no one likes to contemplate the death of a child, families might want to do this for several reasons. The purchase locks in the insurability of the child, so that no matter what health conditions or other issues a child may experience later in life, the child is guaranteed to have life insurance as an adult. Further, permanent life insurance contracts provide cash accumulation vehicles for some families that are able to fund their policies with substantial premiums; cash value accumulates tax-free, and can be accessed tax-free for any purpose, in most cases. Furthermore, cash value life insurance does not count against a child when applying for financial aid. A life insurance policy on a child enables a family to pay final medical expenses and burial costs, and gives parents the freedom to take some time off work to grieve or spend time with surviving siblings in the event of a child's death.

   Anticipating Final Expenses

   • Life insurance may be useful for ensuring that enough cash is available at the insured's death to divide an estate equitably among heirs when the estate itself isn't easily converted to cash, to pay funeral and other final expenses, and to provide for a widow or widower later in life. End-of-life issues tend to require permanent insurance policies -- often bought at much younger ages -- because term policies often expire or become unaffordable before the insured reaches life expectancy.