In my last post, “Why You Need a Personal Financial Safety Net,” I identified putting appropriate insurance coverages in place as an essential building block. Anytime you bring up the subject of buying insurance, however, people’s eyes glaze over. In fact, most folks believe insurance is not a priority as it is either a luxury or waste of money. In this post, I hope to challenge these beliefs and help you understand that there are valid, common-sense reasons to buy insurance.
Financial Risks
There are key financial risks that you need to protect against in the FinancialVerse. They include:
Disability – The risk of becoming physically or mentally disabled and not able to continue to work.
Property Damage – The risk of having your property damaged by accident, by another person or by act of God.
Health – The risk of becoming ill and not having sufficient resources to pay for the costs of care, including long-term care for older individuals.
Premature Death – The risk of dying too young and not being able to earn the income and accumulate the assets necessary to support your needs or leave funds to provide for the future needs of your dependents.
Debt – The risk of accumulating or relying on too much or too costly debt such that the debt cannot be comfortably repaid from current cash income.
Liability – The risk that you will physically, emotionally, professionally, or financially harm someone in an accident in your car, home, or other physical or digital location and are held legally responsible to pay cash damages to the person you harmed.
Longevity – The risk that you live a very long life and won’t have the cash income to pay your living expenses. It is the risk of running out of money in old age when you are unable to work. The risk of running out of money in old age is a major concern in our society today.
The good news is that you can buy insurance coverage to reduce or eliminate the financial impact of many these risks on you and your family.
Common-Sense Reasons to Buy
When you buy insurance protection you are purchasing several key common-sense benefits including:
Cash for future delivery when it will be needed to cover the losses and pay the related bills (e.g., buy a replacement house or vehicle damaged by fire or accident)
Cash flow certainty. Insurance provides guaranteed coverage in exchange for the premiums you pay. You are certain that if a loss takes place cash will be available to offset all or a significant financial portion of the loss.
Direct payment of bills (e.g., medical and dental bills)
Income or spending potential for your later years (e.g., from annuity products)
Protection of your income from disability (e.g., disability insurance)
Support to qualify for a loan (e.g., car and home insurance)
Financial security for your family so that they know if something happens to a breadwinner that cash will be available to pay the bills or keep them in their home
Psychological peace of mind knowing that you have taken care of your financial responsibilities in case something happens to you
Creating long-term savings habits (e.g., buying cash value life insurance and paying for it over a number of years)
These common-sense benefits all provide protections for you and your dependents from life’s uncertainties.
Focus on Life Insurance
In my new book,Today’s Life Insurance – A Protection Tool for Your Future, I go into depth discussing these benefits as they relate to life insurance. Let’s look at some of the topics I discussed.
Why Buy Life Insurance?
As we lead our lives, we buy insurance for our health, our car, the contents of our apartments or to protect the investment we have in our homes. We do so because, in most cases, having the coverage is mandatory. The bank, landlord, or other lender require that we have the insurance as a condition of getting the loan or obtaining a lease. Conversely, buying life insurance coverage is a voluntary act. It is something you must decide to do based on your individual needs and circumstances. No one is going to force you to buy it.
According to a recent survey by the financial services firm Edward Jones and the nonprofit consumer-education organization Life Happens, 81 percent of Americans believe their family is their most valuable asset, but less than half (41 percent) of them are protecting their family with an individual life insurance policy. In fact, according to the ‘Protecting What Matters Most Study’ published by these organizations, roughly one third of Americans (32 percent) indicated that life insurance is a low priority—or is not a priority at all—when starting a family.
Americans as a whole don’t bother to buy life insurance because they don’t view the purchase to be a priority. The reason to buy is to acquire needed risk protection for an affordable price. You will find that today’s life insurance provides a unique set of protections not available from other financial products.
Most people procrastinate and seriously avoid the purchase of life insurance until a key event takes place in their lives. These include events such as getting married, having a baby, reaching an age milestone (e.g., turning forty years old), being diagnosed with a serious illness, or experiencing the unexpected death of a close friend or family member.
I am here to tell you that today’s innovative life insurance products are different. Today’s products are designed to deliver money in the future when it is needed most for a variety of reasons. From a cost standpoint, premium rates are at near record lows. Today’s products also make available what are called “living benefits” that can help protect you against a number of key financial risks while you are alive—instead of only covering the risk of dying prematurely.
The Key Risks Life Insurance Protects Against
Most people do not take time from their busy lives to objectively look at risks until something unplanned and unfortunate happens around them. If you don’t take the time, you, your dependents, your family, or other significant people in your life may encounter major money detours, potholes and challenges. This might include having to sell the family home and move upon a death, not attending college, and experiencing a substantially reduced standard of living. The list goes on and on. A key learning for you is to know there are ways risks can be identified and mitigated for your benefit. It just takes a little time and effort on your part. In my view, it is essential for you to address each risk.
Life insurance can be purchased to protect against and eliminate or mitigate the negative financial impacts of disability, unexpected health costs, premature death and longevity. Today’s life insurance can provide the funds to address each risk with one product for one premium. That is what differentiates today’s life insurance products from those of yesterday.
Why Not to Buy?
It is also important to know when buying life insurance is not needed. In its basic form, life insurance provides cash for future delivery to pay the costs of the financial risks described above. If you and your family are lucky enough to have sufficient cash in the bank or other assets to properly protect you against the key financial risks, you likely do not need to purchase life insurance coverage. You can fund these expected future costs using your existing resources. If you don’t have the financial resources to pay for these events or your family has not accumulated significant wealth you want to pass on to future generations, you should consider purchasing life insurance to minimize or eliminate these risks from your life.
The Hidden Benefits
The number one hidden benefit that most consumers do not understand about life insurance is that the death related benefit or what is called the face amount of the policy is not subject to income tax. For example, if you buy a $300,000 life insurance policy on your life and you die – your beneficiary will receive $300,000 without paying any income taxes.
Most of today’s life insurance products also provide a comprehensive group of other benefits (some require an additional charge) that provide cash to the buyer if a certain triggering event takes place (Examples include: if the insured dies in an accident, becomes terminally ill or experiences a critical illness). You will notice that not all triggering events are death related. Certain benefits payout while people are living. In fact, cash value policies also allow access to cash in case of an emergency or make it possible to use available policy loans to create supplemental tax-free income for the buyer’s later years. In the past ten years, the breadth of what are called living, rather than death-triggered benefits offered has increased substantially as the impact of new technologies and product innovation has come to the life insurance industry.
This ability to purchase one product, and at the same time, protect against multiple risks for one lower, combined price is why you need to consider purchasing the product as part of your personal financial safely net. This is not widely known or understood by most consumers.
Summary
Why buy insurance coverage? You buy because you have financial risks in your life that insurance coverages can cost effectively address on a contractual and guaranteed basis. You are buying financial protection against life’s uncertainties. In today’s pandemic-influenced world, this is very meaningful.
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