checked threads before asking: 1 2 3
I have been so focused on running away of debt, that I haven't thought on future events. I am trying to decide when do I know that I need life insurance?
My brother just called me and told me he got a policy. I tried to convince him that spending money towards insurance makes no sense if you have high interest debts. Is this a good argument, or I am just completely missing the point?
Here's an easy 2 question test:
(1) Is there anyone who relies on your income for their general welfare?
(2) Is it worth the premium amount to you to make sure they aren't left out in the cold?
If you can answer yes to both questions, buy (term) life insurance.
It boils down to this: Who, or what, would you want to take care of financially if you were to die tomorrow?
That's why you need life insurance.
I'm pretty sure that your creditors would line up to receive payment from the life insurance check, so that's part of figuring out how much coverage you should have.
The life insurance premiums are another monthly payment, of course, but every day there is a small chance that you could die. Insuring against that small chance vs. paying down your debt faster is a decision that needs to be made, and you (or your brother) are the ones that will make it.
There are two types of insurance: whole life and term.
I don't recommend whole life insurance, because you are insuring against something that will happen, your death. Maybe you could buy it if members of your family have a history of outliving the averages. This is called "adverse selection."
Term is different: it insures against your UNTIMELY death. Many people I know take term insurance for the X years until their last child leaves college, or some other well defined "term." They don't want to die before this term but will be satisfied with the insurance as a "consolation" prize.
You only insure assets, and you only insure them for the people that depend on them. You don't need to insure a liability. Therefore:
Example: I have life insurance equal to a couple of years salary, in order to make sure my wife doesn't encounter any hardships if I die. I'm the primary income earner, and she will take of the kids. Once we have kids we'll get life insurance for her to cover what the costs would be to take care of the kids if she were to die.
Well, actually in your brother's case it's quite a good idea. Not as a savings method, but as what it is - insurance.
As long as he's alive and well he can pay his own debts, they're his problem and it's his responsibility. Once something, god forbid, happens to him - the debts become the problem of his survivors (you, if he doesn't have kids, for example). His life insurance should provide the means to pay off the inherited debts.
So the point of life insurance as insurance is to make sure those who survive you have enough of what they need to continue living as they were with you. Some policies take into account injuries and work disability, so that not only when you die there are benefits, but also when you had an accident and can no longer work. Some policies are basically a combination of savings and insurance - that's the policies discussed in the investing threads.
edit
as clarified in the comments, debts cannot be inherited per se, they will be paid off from the estate before disbursement of such. What it means though is, if the deceased had accrued significant debt, all his assets may go to the creditors leaving survivors with nothing, which may also mean homeless. That was the kind of a problem I was talking about.
