Life Insurance 101

Alden Wicker

There are so many ways to be a good spouse and parent: washing the dishes unasked, supporting your family’s ambitions and dreams, throwing a surprise birthday party complete with red velvet cake (your 11-year-old’s favorite!) … and getting life insurance.

Yup, life insurance is a key aspect of a couple or family’s financial plan. It’s not necessarily something you want to think about, but we think you’ll want to read this guide–it could be one of your biggest regrets if you don’t.

Life Insurance in a Nutshell

Life insurance is like other types of insurance–car, home, health–in that you pay a monthly premium in case something bad or unexpected happens, in this case a death of an income earner and/or spouse.

In short, it means that if you or your spouse dies, you or your children won’t have to deal with financial uncertainty and drastic changes while also dealing with the emotional loss. Your life insurance policy isn’t for you; it’s for other people in your life who depend on you.

Clearly, life insurance can’t “replace” a deceased loved one, like car insurance can replace a car. But it can replace—at least partially—the income he or she was contributing to the household, the income you or your children depend on to stay financially secure and enable your family to continue to live a lifestyle close to what you have now.

Why Life Insurance Matters

Compared to health insurance, which you use every time you pick up a prescription, you rarely have a reason to think about life insurance. But it’s arguably the most important kind.

Life insurance is especially important right now, as more families have been forced into living on a single income due to the recession. In a 2010 survey by insurance research firm LIMRA, 40% of households with children under 18 said they would have trouble meeting financial obligations if a primary breadwinner passed away. But unfortunately, LIMRA’s research shows that individual life insurance ownership is at a 50-year low.

  • Larry

    A comprehensive article… however I would ask you to reconsider your comment: “The only people who don’t need life insurance? Singles who have no one depending on them for income and no major liabilities outstanding.”

    I spent 17 years as an insurance specialist and shared this story many times with financial advisors:  my younger brother at 25 had no debts, wasn’t married, had no children… and in your perspective didn’t need life insurance.  A few short years later he was married, had a mortgage, and a baby boy.  But in the interim survived lymphoma.  With significant financial responsibilites he wasn’t able to buy life insurance until about 9 years later, when he was rated and paid 4x the cost a healthy person would have paid.

    He just enjoyed his 54th birthday, his son is in university, and his mortgage is paid off.  It could have been a lot different story.

    I recommend even younger people with no immediate liabilities purchasing a block of Term 10 insurance in anticipation of becoming parents, home owners, and possibly business owners.


  • Gars

    Two books I recommend are Insurance for Dummies and The Invisible Bankers by Andrew Tobias if you want an education in basic insurance.

  • Momentum Risk Transfer

    Life Insurance is the foundation of personal financial planning for many individuals, especially those with dependents. There is lots of misinformation on the web, this site has some great insights on life insurance. Thank you for sharing. I am reading a must read for any consumer interested in knowing more about life insurance..”Life Insurance second edition a consumer’s handbook” by Professor Joseph M. Belth……I know it is not something many of us consider, however it is very important.