The Purposes of Life Insurance

The number one reason to have life insurance is, obviously, to protect your beneficiaries if you die prematurely. That’s clear. Every other reason is secondary — although for some
people, the other purposes can take on greater importance in certain situations.
Providing protection for beneficiaries
Protecting your survivors means replacing the income you bring in if you die prematurely. If you have children, you probably spend your earnings on the costs of bringing them up. If you die, your life insurance death benefit replaces those earnings so that they won’t have to suffer financially. If you have a mortgage on your house, a life insurance death benefit can help your family stay in their home if you die.
Life insurance can help you overcome the difficulty of having to totally change your way of life because you lose half or more of your income.
Lastly, if you are part-owner in a business, the business may purchase a life insurance policy on you so that if you die, your partner can use that death benefit to buy out your share of the business from your heirs.
Using life insurance as an investment
A second purpose of having life insurance is to use it as part of your investment portfolio. Most financial advisors encourage you to balance your investments so that if one kind of investment goes down (the stock market, for example), another one will likely go up (bonds or real estate, perhaps). By balancing your portfolio and diversifying your investments, you can weather storms in one area by having some assets in the other areas that go up or stay level.
Some life insurance policies are actually long-term investments, which you can contribute to and withdraw funds from before you die. These so-called cash-value policies —whole life and universal life insurance are actually savings accounts that accrue a cash value over time and also pay for your protection. Although these policies don’t command the highest interest rates you can find, they are untaxed earnings, so you get a higher return
than simply putting your money in a savings account on which you must pay taxes.