The Importance Of Setting Up A Life Insurance Policy

Author: Danielle Purnell

The importance of setting up a life insurance policy

For a moment, consider the various categories of insurance you think about on a regular basis. It's quite possible that life insurance may not be among them. After all, it's not specifically something that affects you on a daily basis in quite the same way as car insurance, homeowners' insurance and healthcare coverage.

It does affect your daily life in one major way - as morbid as it may sound to bring it up, you could, hypothetically, die at any given moment from any number of causes. Were you to pass away without life insurance, your spouse, children and relatives would not only be grief-stricken but also saddled with costs they aren't able to deal with. This will only make the pain and stress that much more severe.

With all of that in mind, it's best to get your life insurance squared away while your children are still young, and while you and your spouse are steadily and gainfully employed. Before you consider other factors, there are some aspects of life insurance that must be addressed right away.

The internal rate of return (IRR) on the death benefit of a life insurance policy is arguably its most important element. It is the amount your family members regularly receive, based on the continued premium payments that were made and the total amount of the death benefit.

If you live to the current average life expectancy - approximately 75 to 80 years - it is around 4 to 5 percent of the benefit, whereas if you pass away short after your policy begins, for example, it is considerably higher.

It's also important to remember that IRR payments are income-tax free, and if you have a reliable insurance agent that helps you work out an optimal policy, they will not be affected by estate or inheritance taxes either. 

Have you thought about your life insurance policy lately?

In Brief

  • For a moment, consider the various categories of insurance you think about on a regular basis.

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