DR. WALLACE: I’m only 17, but my grandfather on my mother’s side of the family recently purchased a life insurance policy for me! I’m quite surprised by this since I’m so young and healthy right now. I could understand if he was buying one for my grandma or even my mom and dad, but it shocked me that I was the named person on this policy!
Why do people buy life insurance policies and what are they used for? I thought only old people needed it. I’m interested in working in business one day, so maybe I can use this as a learning experience in the future. I already know about loans and bank accounts and making interest and paying interest and so on, but I don’t know anything about insurance except everyone seems to have car insurance in case they get involved in a car accident.
What does life insurance do and why is it important? — Really Surprised Teenager, via email
REALLY SURPRISED TEEN: Life insurance is a multi-faceted industry, and there are many ways to acquire it for a multitude of reasons. Since you are young and surprised by this subject, I will try to provide examples that you can hopefully relate to.
Although you don’t know much about life insurance, you’ve probably heard of Costco warehouse stores. Even Costco offers life insurance! Costco aims to provide products and services at great prices, so their involvement in this industry is designed to help their members as much as possible.
People need life insurance and use it as part of an overall financial plan. As a person progresses in life, insurance becomes more and more important. Marriage, buying a home and starting a family are all very important reasons to purchase insurance in one form or another. Then, one day, retirement planning also comes into play.
Costco recently mentioned a list of the top five reasons people buy life insurance to protect themselves and their families:
#1: Income Replacement
It helps a family or an individual to maintain their current lifestyle after the death of a family member.
#2: Mortgage Payments
Such insurance can protect a family’s home and/or belongings.
#3: College Tuition
Early investment can help budget for future college or professional education costs.
No. 4: Payment of debts
Insurance can also be purchased to cover debts that would otherwise be passed on to other family members.
No. 5: Take care of the parents
Insurance is available to plan and fund retirement and home care.
In your case, your grandfather may have taken out a term life insurance policy for you, a policy that can probably pay off over time. This means that a portion of the premiums he pays can go forward to build up accumulated cash. The larger the portion of the premium allocated to cash value, the more that cash can accumulate and accumulate over time.
If he has indeed purchased this type of policy, it is conceivable that there may be a limited term to your policy and cash value may exist upon its completion. Either way, I suggest you take this opportunity to thank your grandfather and ask him to help you learn about insurance and why he thinks it’s important to him and your family.