N.B. This issue will address those situations where life insurance is an appropriate solution, but will not discuss amounts. Future issues will address various methods used for determining an appropriate amount.
Since life insurance is a financial product designed to create a sum of money upon someone’s demise, the question becomes “Whose demise creates a need for a lump sum of money?”
The obvious answer is someone who provides financial support to another, and when the death of the provider would end, decrease, or interrupt that support. However, in addition to financial support, another element must be present before life insurance is appropriate, and that is love. Think about it; if you don’t love someone, some thing (a business, a family foundation, an alma mater) or some cause (curing a disease that perhaps took a loved one way too soon), why would you care what happens to them when you’re gone?
So if financial support and love are the primary criteria for determining when life insurance should be considered, what are some concrete examples? A family unit is the obvious answer, but it is also often appropriate in business and philanthropic situations.
Perhaps some of the reading audience remembers the 50’s and 60’s sitcoms, Father Knows Best and Leave It To Beaver. They reflect the traditional use of life insurance: the nuclear family’s breadwinner providing the sole support of the entire family. (As an aside, Jim Anderson, the father in Father Knows Best -played by actor Robert Young - was a life insurance agent. I don’t remember what Ward Cleaver’s profession was, but it was clearly white collar)
Today, two incomes per family is the norm, but that doesn’t change the fact that a death of either one would in most cases create a financial hardship on the survivor. In this scenario, it is appropriate to insure both lives.
Even in the 1950’s version of the American family, where one spouse provides the entire support for the family, it is still appropriate to insure the non-working spouse.
Life insurance is also an appropriate solution in many business situations, including partnerships, stockholder redemption, key man, buy-out, deferred compensation, golden handcuffs, and as part of an employee benefits program.
It is also an appropriate tool to help accomplish philanthropic goals, as it can provide funds to a favorite charity without disinheriting loved ones. Many non-profits have planned giving departments that actively solicit life insurance policies on donors.
One of the more controversial issues is life insurance on children. Since the death of a child generally doesn’t create a financial loss for the parents (except perhaps in the rare case of a child actor or model), it doesn’t fit the parameters for appropriateness. So why do some people insure their children?
The reason is productivity. The premium on a newborn can be 50-60% less than the premium on a 25 year old. By procuring life insurance on their child (or grandchild), parents (or grandparents) are locking in the lowest possible rate, while at the same time protecting against the negative effects a potential future health issue would have on insurability and/or premiums.
To summarize, life insurance is a very versatile financial tool, suitable in a myriad of circumstances. Financial dependence and love are two of the basic elements to indicate its appropriateness.