Replacing Income With Term Life Insurance

This may be intuitive to most people but it's important to really break down life insurance to it's core function which is to replace income. It's important to get back to the basics and understand this key role if anything, to drive home the importance of why even consider life insurance to begin with. So let's dive into the the core function of replacing income over potentially a long period of time.

There are some rather unique uses and roles for life insurance out there but most of the need people face for this particular protection revolves around a loss of income. Unless you are independently wealthy or have no financial responsibilities (more power to you) or dependents, you will need to protection of term life to address the potential loss of income. Let's take a step back and walk through the loss of a financial provider and how it works.

We all walk through life with the expectation that income will continue to come in. Think about it. We have expenses and liabilities that will continue monthly for years (and decades if you're talking about mortgages). What happens if your income were to stop tomorrow? Really think about it. If you're like most people in the United States, you would be in financial trouble within a few months if not immediately. It doesn't really matter how much you make either. Typically, as income increases for a person, so does the expense side. Whether it's $24K or $240K, the expenses are usually right behind (if not in front). Most people in America do not have the 6 month of income buffer in liquid savings that are needed to handle a potential downturn. We just don't plan for the worst case. Term life insurance is an inexpensive way to hope for the best and plan for the worst.

The recession that started in earnest during 2008 exposed this very weakness over a relatively short period of time. Many people from all walks of life and socioeconomic backgrounds were equally wiped out. The first wave resulted in foreclosures and bankruptcies rather fast while those with more assets were able to hold out another year...only to spend through their retirement and assets to result in a similar situation. That was 12-18 months. Now imagine 12-18 years! Now, the surviving spouse may have some means of generating income but there's an obviously loss of income due the passing of an earner within the family. Either way, over such a long period of time, without the protection of life insurance, assets and retirement not to mention the continued onslaught of expenses and at-risk assets (such as your house) may be lost during the transition.

Term life has become so inexpensive that's hard to argue having some baseline of coverage to replace this lost income. We're not talking 12-18 months but affordable coverage to protect over the course of years and decades. There's two ways to accomplish this replacement. Let's say you were making $50K annually and you want to take you family through the college years for your children, the youngest of which is 12. You can then choose 10 years of term life insurance (taking your youngest to 22) for $500K (Which is 10 years at $50K). This way, you are essentially spending down the life insurance benefit with some investment to slow the spend-down. Another way is to invest the $500K with a profession investor (avoid the tempting pitfalls of a lump sum benefit) and use the investment income to supplement your existing income. The choice is your but both have advantages and disadvantages. More importantly, both are geared around replacing lost income and that's the key function of term life.