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The Role Of Life Insurance In A Financial Plan


Life insurance helps loved ones cover expenses and progress toward financial goals after you’re gone.

When you’re making a financial plan, life insurance probably isn’t the first thing that comes to mind. But if you pass away, life insurance helps take care of your loved ones when you can’t.

It helps your beneficiaries stay on track to pay off your mortgage, pursue secondary education, retire on time, and reach the other financial goals you’ve made together. It protects them from the sudden loss of income they could experience. Life insurance won’t help you reach your goals, but it ensures that your loved ones still can when you’re gone.

In this guide, we’ll cover:

  • Life insurance basics
  • How to decide if you need life insurance
  • How to apply for life insurance

Life insurance basics

Whatever policy you buy, life insurance has five main components:

Policyholder: The person or entity who owns the life insurance policy. Usually, this is the person whose life is insured, but it’s also possible to take out a policy on someone else. The policyholder is responsible for paying the monthly or annual insurance premiums.

Insured: Also known as the life assured, this is the person whose life the policy covers. The cost of life insurance heavily depends on who it covers.

Beneficiary: The person, people or institution(s) that receive money if the insured dies. There can be more than one beneficiary named on the policy.

Premium: This is what you pay monthly or annually to keep a policy active (or “in-force”). Stop paying premiums, and you could lose coverage.

Death benefit: This is what the insurance company pays the beneficiaries if the insured person passes away. As soon as the policy is in force, the beneficiaries are usually eligible for the death benefit.

In some circumstances, insurance companies aren’t obligated to pay the death benefit. This includes when:

  • The insured outlives the policy term
  • The policy lapses or gets canceled
  • The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application

Term life insurance vs. permanent life insurance

Term life policies last for a set period of time. When the term is up, the policy expires. This is usually the most affordable type of life insurance. And since it’s not permanent, you can let it expire once you reach your financial goals and have other means of providing for your loved ones. You’re not stuck paying for protection you no longer need. In fact, the premiums are so low that you can even abandon your policy later without losing much money.

Permanent life insurance policies don’t have an expiration date. They last for as long as the policyholder pays the premiums. Since they’re permanent, these policies also have a cash-value component that can be borrowed against. These policies have higher premiums than term policies. Permanent life insurance policies include whole, variable, universal and variable universal life.

So, should you sign up for life insurance?

If you have financial dependents, and you don’t have enough money set aside to provide for them in the event of your passing, then life insurance should be considered. Here are some cases where buying life insurance might not be beneficial:

  • You have neither a spouse nor dependents
  • You don’t have any debt
  • You can self-insure (you have enough saved to cover debts and expenses)

Unless that describes you, getting life insurance should probably be on your To-Do list. How much coverage do you need, though? That depends.

If you’re married, you might want to leave a financial cushion for your spouse. You also might want to make sure that they can continue to pay off the loans you co-signed. For example, your spouse could lose your house if they are unable to keep up with the mortgage payments. Consider choosing a policy that will cover any debts your spouse may owe and the loss of your income. A common rule of thumb for an amount is 10x the insured’s income.

If you have kids, consider getting a policy big enough to cover all childcare costs, including everything you pay now and what you may pay in the future, such as college tuition. You may wish to leave enough behind for your spouse to cover your kids’ education expenses.

Your death benefit should usually cover the entire amount of all these expenses, minus any assets you already have that your family can use to make up some of the financial shortfall. This could be as little as $250,000 or as much as several million dollars.

How to apply for life insurance

Applying for life insurance usually takes four to eight weeks, but you can often complete the process in just seven steps:

  1. Compare quotes from multiple companies
  2. Choose a policy
  3. Fill out an application
  4. Take a medical exam
  5. Complete a phone interview
  6. Wait for approval
  7. Sign your policy

And just like that, you have life insurance—and your dependents have a little more peace of mind.

Life insurance is about preparing for the unexpected. As you set financial goals and plan for the future, it’s important to consider what your family’s finances would look like without you. This is your fail-safe. In the worst case scenario, life insurance could prevent financial loss from adding to your loved ones’ grief.



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