Explain Like I'm Five:
Do I Need Life Insurance?

You are just starting kindergarten: congrats! Your school offers three different lunch options:

• A cold lunch for $1.00

• A hot lunch for $1.50, and

• A hot lunch with dessert for $2.00

Every day, your mom and dad can give you $2.00 for lunch. This means you can get a hot lunch with dessert every day! Yum! You enjoy this lifestyle for your first year of school, but then your mother becomes deathly ill. Soon after, she passes away. Your father does his best to explain that he can only afford to give you $1.00 for lunch every day from now on. You find a way to continue and survive, but you can no longer buy that yummy dessert let alone a hot lunch. Some days you get clever and skip lunch in order to buy a hot lunch with dessert the next day. This works, but you can't afford to do it too often because you have to literally starve yourself the day before and that's neither fun nor healthy. Such is the way you live out the rest of your school days.

But what if mommy and daddy had life insurance? Then that changes things. In order to maintain the policy, your parents would need to pay a premium. In our example, let's say that the cost of insurance is $0.25 every school day. Now they can only afford to give you $1.75 each day for lunch; but being the clever parents they are, mom and dad give you $1.50 for a hot lunch every Monday through Thursday, and then give you $2.00 for lunch every Friday so you can also treat yourself to dessert! Yay! Again, you get accustomed to this lifestyle for your first year of school, but then your mother becomes ill and passes away. The company your mom and dad were paying $0.25 to every school day now begins to pay back your family back. Your father is still able to give you $1.50 for a hot lunch each day and $2.00 for the added dessert on Fridays. You find a way to continue and survive, this time never having to sacrifice a hot meal nor the occasional dessert. You never have to eat a cold lunch nor go hungry.

Neither example will bring back your mom, but with life insurance, you are able to maintain the standard of living you have become accustomed to. It is far more likely that, if you're reading this, you identify more with one of the parents. What is your child's current standard of living? Would it be affected much if you took out a life insurance policy? How would it be affected if you passed away?

Of course the hope is that both parents live a full and healthy life into natural old age, but we are not always so lucky. What are you prepared for?

Final Expense—also known as burial or funeral insurance—is an extremely common type of life insurance. This specialized policy has a much smaller death benefit (usually between $5,000 and $35,000) and is designed to release its funds more immediately upon the insured's death. These funds can take care of funerary, ceremonial, and burial (or cremation) costs rather than placing those financial burdens upon an already grieving family.

Another common use of life insurance in the business world is known as Key Person insurance. If a business heavily relies on a single employee for its revenue, then that key employee can be insured against in the event of accidental or untimely death or disability. For example, if an auto mechanic shop relies heavily on a single knowledgeable mechanic to service all cars, the business could suffer or go bankrupt if something were to happen to that particular mechanic. If the business purchases Key Person insurance on that mechanic, however, they would be able to pay their bills and obligations while figuring out how to move forward after their loss.

A related form of insurance often used among business partners is known as a Buy-Sell Agreement. When a partner in a firm or business dies, their share of the company is passed onto their survivors: often a spouse or child. Those heirs may envision an entirely different direction for the company or may not take an interest in it at all. Either way, it can become extremely difficult for a surviving partnership to sign off on official decisions after the passing of one of its partners. With a Buy-Sell Agreement, each partner is insured for their percent stake in the business. In the event of their death, the insurance claim is used to buy out the partner. Any surviving partners will receive the insured's stake in the company, and the insured's beneficiaries receive the death benefit as payment.