Life Insurance Basics
Life insurance is a very basic financial tool that is an application of the law of large numbers. Statistics show that at each age, a certain percentage of the people in each age group die each year. By understanding these numbers, companies can offer a policy to everyone in that age group at a fair price, and these Life Insurance policies can be used to pay off debts, replace income, or secure homes & properties from tax burdens.

Life insurance cannot replace an individual, but it does fill an important financial gap when a family looses a loved one, especially if that loved one was making a financial contribution to the well-being of the family. Just at the time when a family needs it most, the life insurance can make a huge difference to the people left behind.

Life insurance has been described as a “self-completing savings account,” and a person can using the life insurance to offset a savings account, whether within or separate from the account. If the contributor to that account dies, the full value of the account is paid to the beneficiary regardless of whether it is in the first year of the policy or the 30th year.

Life insurance can be used to secure debt against the possibility of loss. If a person purchases something like a home or business or equipment or even a car or a boat or something like that, and takes out a life insurance policy that pays off that debt if a death to the breadwinner occurs, the surviving family has the things they need to continue on in the event of tragedy in their lives.

Life Insurance in Business
Life insurance is often used in business in many ways. One of the most frequent uses is to fund a Business Buy-Sell agreement. If two men are partners in a business, and one should die, the remaining partner is then in business with the deceased partner’s heir. That heir, usually a wife, is then entitled to half of the business proceeds whether she is able to contribute to the business or not. A Business Buy-Sell agreement, drawn up by an attorney, establishes a value for the business and directs the business owners to fund the agreement by purchasing life insurance on the business partners for half of the value of the business, and making their partner the beneficiary of their life insurance policy. The Business Buy-Sell agreement then directs the life insurance be used by the partner to pay to his partner’s heirs to purchase his half of the business. The result leaves the business in the surviving partner’s hands alone, and the deceased partner’s heirs have received the fair value for the half of the business that they owned because of the partner’s death.

The same principle applies to a corporation owned by two or more people, only it is called a Stock Purchase Plan. At the death of a stockholder, the life insurance that the company has on him is paid to the company and the company is directed to pay the heirs the value of the stock, which is the amount of life insurance on the stockholder. The company then owns the stock and the heirs have received the payment for the stock’s value.

There is another type of life insurance used to secure the future for businesses that have highly skilled or specifically talented employees. If an employee has great value to a company, and it would cause a financial hardship on the company if the employee should die, then the business can write a life insurance policy on the employee that will give them money to search and/or train a replacement should the employee die while in the company’s employ. This is called Key-Man Insurance. Often the Key-Man Insurance can be funded with a permanent cash-value insurance plan that the employer can use to incentivise the employee, letting his know that if he will stay on as an employee until he retires, the cash value in the life insurance policy will be his to do with what he wishes, in addition to his retirement, when he retires. This is often called “Golden Handcuffs” in the insurance business.

The Importance of Life Insurance

Lon Sorensen has said, "Life insurance is the only thing I know that will create an immediate estate for a family when it is most needed. I suppose that winning the lottery will also create an immediate estate, but you just cannot rely upon it to be there when you need it. Life insurance will be there when you need it!"

Purchasing life insurance is dependent upon three things: Age, good health, and money. The better your health is, the less expensive it is, and the younger you are the better your rates will be. So buy as much as you can afford at the youngest age you can while in your best health. Your family will be glad you did!