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Are you considering or being pressured to buy life insurance? Join the crowd. Life insurance is one of the most ubiquitous financial products to ever be sold. While life insurance can be a valuable tool in any financial plan, knowing if you even need it — along with the right amount and type to buy — can be challenging. There are questions such as: How do I know if I need life insurance? If so, how much life insurance do I need? What type of policy should I buy? How do I know if I am getting the best value and price for the life insurance I buy?

Purchasing life insurance is often tedious, intimidating and complicated, but it does not have to be that way. The insurance companies may offer multiple confusing policies and throw around a lot of jargon that sounds like a foreign language, but in reality, the concepts are simple. Once you understand the true basics of life insurance, your decision can be straightforward and result in the best buy for you.


What you should know about life insurance:

The purpose of life insurance (and, really, its only value) is to offset the economic cost of dying. If you have a spouse or young children who would be faced with financial hardship in the event of your death, life insurance proceeds can solve that problem. If you are a key person or partner in a business, life insurance can help to stabilize the business in the event of your death.

If insurance companies try to convince you that a life insurance policy is anything other than a way to replace your income or long-term economic value to a family or business in the event of your death, they are doing so for their benefit, not yours. Life insurance is not an investment — it is not a way to make money or an effective tax hedge.

There is an uncomplicated way to decide if you even need life insurance. Ask yourself: If I die, will anyone I care about suffer an economic adversity that I want to prevent? If the answer is no, then you don’t need life insurance. If, however, you want to protect others from the potential economic cost of your death, the right type of life insurance is the best way to accomplish that objective.

If you need life insurance, what type should you buy?

Life insurance companies have more confusing policy options than a Chinese restaurant. But when it comes down to it, all insurance companies pine to sell you some form of what they call “whole life” or “permanent insurance.” (Both are subtle marketing terms used to suggest you should buy and keep paying premiums on the policy for your whole life.) This type of policy has been the backbone, best selling and most profitable product of the life insurance industry for years. So-called “whole life” may have been a reasonable option in the 20th century when the consumer had few other financial options, but that is not the case today.

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