The unexpected death of a loved one can leave a terrible emotional scar on a family; but it needn’t leave them financially unprepared to deal with the tragedy and loss of the dependent income. That is the purpose of life insurance, to insure against the loss of income. In all reality it should be called death insurance, since the fact of the matter is that we are insuring against the potential loss of income as a result of death.

Buying the right kind of life insurance is not a difficult or confusing task, it is really quite simple if you understand the basics behind what it is and how it is used. Getting right down to it, when you buy life insurance you are basically making a bet, you are betting the insurance company on the chance that you will die. Each month you put up an amount of money called "the monthly premium" and the insurance company puts up an amount of money called "the death benefit" and if you die, they pay the death benefit to your beneficiaries and if you live they keep the premium. As long as the two of you remain in the contract, someone will collect, you or them.

 The amount of premium dollars you spend is based on risk: the risk of the probability of your death. This risk is calculated based on how many people per thousand die at a given age; it is called a mortality rate, and the figures are shown in what are called "mortality tables." So, how does this apply to you? Every year that you get older the chances are that more individuals per one thousand are going to die at your age. Therefore, the longer you live, the chances increase of you dying; hence it costs more each year to cover that risk. If you want to insure yourself against death for a given period of time, say for the term of one year, then you have what is called term insurance – you are paying for just the risk of death during that term or period of time. With term insurance you are paying for just the risk of dying; no whistles, no bells, just the risk of dying. 

Life insurance is for one thing: to replace the income lost from a loved one. It is to protect your income from "dying" so that the family can continue on with life and meet the financial demands that remain after your passing. In other words, that is the risk is you are protecting.

Different kinds of Life Insurance:

There are basically two kinds of premiums for insurance: the expensive kind, and the less-expensive kind. Insurance is insurance: it is covering a risk, how much you decide to pay for that “risk-coverage” is up to you. The expensive-premium life insurance is typically called, “Cash Value Life Insurance.” There are several forms of cash value life insurance: Universal Life, Variable Life, Universal Variable Annuity Life, etc… All of them have one thing in common: you are paying extra premiums for a future risk you may never use. It works like this: Instead of paying the insurance company for the risk of dying for a given year, you are going to pay an average premium that will cover the cost of your risk of dying over your entire lifetime, or on a mortality table that would be to age 100. As you can imagine, that will cost you incredibly more than just for one year. For a newly married couple we’re talking about a difference in premium dollars upwards of five to ten times as much. Why would you pay now for the risk of dying at age 95 when chances are that those who would need the death benefit when you reach age of 95 have probably passed on as well? Remember, life insurance is to replace the loss of your of income so your loved ones can continue on with life when they need that income. 

Since you are paying for a risk that has not been realized yet (because you haven’t reached that age yet) then there has been an overage of premium dollars paid to the insurance company. This money begins to accumulate in an account called cash value. This kind of insurance policy is sold to the public and portrayed as one that contains a “savings” account, but in actuality the legal name for this surplus cash value is “un-earned premiums.” Since this cash reserve is technically and legally premium dollars it therefore legally belongs to the insurance company and that is why you will have to borrow it from the insurance company if you ever want to get at it, or cancel the policy to have the unearned premium dollars you have not used refunded to you. You see, if you cancel the policy then all of those un-earned premiums have not been earned and the company has to refund you that which hasn’t been used. It is surplus premium dollars waiting to offset the increased expense of covering the risk, as you get older. ON the other hand, if you die, then the insurance company keeps all of the "unearned premiums" because that what they are, premium dollars you paid to cover the risk of your death.

What Kind of Life Insurance to Buy:

“Buy term insurance and invest the difference” is a common and sound policy in the financial industry. What it means is that you pay for just the risk of dying now and the money you save from not buying cash value life insurance is invested in something else. Your investment can do much better for you in almost anything else you can come up with than sitting on the books of the life insurance company. In fact, if you put it under your bed, then when you die your beneficiary would get the face value of the insurance policy plus whatever you put under your bed. If the difference was invested wisely, over time it could amount to an incredible savings.

You can purchase term insurance in different increments of time, or terms. You can buy annual renewable term, 5-year renewable term, 10, 15, and 20-year renewable term insurance. In my opinion, the best for a young family is to buy a 20-year renewable term insurance policy that is guaranteed renewable regardless of your health status at the time of renewal if there is a need to renew the policy. Almost any insurance company has these different options of term insurance. One of the possible reasons why the insurance agent will not sell it to you, or even mention it, is because they earn so little in commissions from selling it. In fact, some agents are penalized for selling it.

The Theory of Decreasing Responsibility:

Let’s put these principles into perspective and find some application. You should get the maximum amount of life insurance your dollars will buy at a young age when your family (or business) are most dependent upon it financially. Get enough insurance now so that you are adequately covered in case of an untimely death so that the spouse will be able to continue with the responsibilities of being a parent and the children can be assured of your income to see them through their growing years. 20-year, renewable term insurance will cover that need – low cost, inexpensive, and lots of it. At the end of 20 years the children start reaching that stage in life that if you die the financial implications will not be as severe as they are when they are younger. And, if you continue living like most of us plan on doing, then the need for that much insurance is now diminished. Why? Because if you have been saving the difference wisely, then the savings you have built up will act as self-insurance in the event of your death, and a nice reward for when you live! Look at it as insuring yourself for living. When you reach the golden years and are looking at retirement would you rather have a $10,000 life insurance policy – good only to your loved ones if you are dead – or possibly $100,000 in your savings just waiting for you to enjoy?

Purchase enough life insurance to cover against the devastating effects caused by the loss of income, when the needs are greatest at a young age by using a 20-year level term insurance that is guaranteed renewable. Establish a serious savings and invest plan to provide for the probability that you and your family will live to a “ripe old age” so that you can enjoy life together. Be wise. Know your facts and game plan before you buy, then be patient – Remember, building anything of value takes time.