This
may be intuitive to most people but it's
important to really break down life
insurance to it's core function which is
to replace income. It's important to
get back to the basics and understand
this key role if anything, to drive home
the importance of why even consider life
insurance to begin with. So let's dive
into the the core function of replacing
income over potentially a long period of
time.
There are some rather unique uses and
roles for life insurance out there but
most of the need people face for this
particular protection revolves around a
loss of income. Unless you are
independently wealthy or have no financial
responsibilities (more power to you) or
dependents, you will need to protection
of term life to address the potential
loss of income. Let's take a step back
and walk through the loss of a financial
provider and how it works.
We
all walk through life with the
expectation that income will continue to
come in. Think about it. We have
expenses and liabilities that will
continue monthly for years (and decades
if you're talking about mortgages).
What happens if your income were to stop
tomorrow? Really think about it. If
you're like most people in the United
States, you would be in financial
trouble within a few months if not
immediately. It doesn't really matter
how much you make either. Typically, as
income increases for a person, so does
the expense side. Whether it's $24K or
$240K, the expenses are usually right
behind (if not in front). Most people
in America do not have the 6 month of
income buffer in liquid savings that are
needed to handle a potential downturn.
We just don't plan for the worst case.
Term life insurance is an inexpensive
way to hope for the best and plan for
the worst.
The recession that started in earnest
during 2008 exposed this very weakness
over a relatively short period of time.
Many people from all walks of life and
socioeconomic backgrounds were equally
wiped out. The first wave resulted in
foreclosures and bankruptcies rather
fast while those with more assets were
able to hold out another year...only to
spend through their retirement and
assets to result in a similar
situation. That was 12-18 months. Now
imagine 12-18 years! Now, the surviving
spouse may have some means of generating
income but there's an obviously loss of
income due the passing of an earner
within the family. Either way, over
such a long period of time, without the
protection of life insurance, assets and
retirement not to mention the continued
onslaught of expenses and at-risk assets
(such as your house) may be lost during
the transition.
Term life has become so inexpensive
that's hard to argue having some
baseline of coverage to replace this
lost income. We're not talking 12-18
months but affordable coverage to
protect over the course of years and
decades. There's two ways to accomplish
this replacement. Let's say you were
making $50K annually and you want to
take you family through the college
years for your children, the youngest of
which is 12. You can then choose
10
years of term life insurance (taking
your youngest to 22) for $500K (Which is
10 years at $50K). This way, you are
essentially spending down the life
insurance benefit with some investment
to slow the spend-down. Another way is
to invest the $500K with a profession
investor (avoid the tempting pitfalls of
a lump sum benefit) and use the
investment income to supplement your
existing income. The choice is your but
both have advantages and disadvantages.
More importantly, both are geared around
replacing lost income and that's the key
function of term life.
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