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Ask the expert: What is life insurance?

Many people avoid buying — and even talking about — life insurance because it brings up uncomfortable and sad scenarios that many rather not think about. But one expert says don't ignore it because you could pay dearly down the road.

"I would say life insurance — if we take away the stigma that life insurance is all about death — I promise you all will be just as excited as I am to learn about life insurance and incorporate it into your family and your business financial plan," said Ebony Ruffin, founder of Ruffin Consulting Services, a business consulting firm providing life insurance solutions to families and businesses.

Janna Herron connected with Ruffin to break down life insurance as part of Cashay's Ask the Expert series that seeks advice from experts on vexing personal finance topics surrounding all of life’s milestones: Education, marriage, parenthood, divorce, and even death. This is the first of three articles with Ruffin on life insurance.

[Interview has been edited for clarity and length.]

(Photo: Getty)
(Photo: Getty) (Oliver Rossi via Getty Images)

What is life insurance?

Life insurance is a contract between the insured and the life insurance company that will provide a payout to the beneficiary in the event the insured passes away. So the best way to think about this is we all function through daily living activities. We rely on someone, someone may rely on us throughout daily living activities. We incur debt, we acquire assets, we build wealth. And with that, you think about what happens when you pass away and life insurance provides typically a lump sum payout in your name to beneficiaries, to provide not just a proper burial service, but to also be able to maintain your assets or be able to sell them to continue generational wealth in your family, and to go above and beyond the income that will be needed to bury you once you pass away.

When should someone consider getting life insurance?

I always say, as long as you're living and breathing, you should have life insurance. Life insurance is providing protection for your life. And we all know with life, death isn't based on an age. So death can happen to anyone at any time and without life insurance, it presents a financial hardship.

In addition to the emotional distress when you lose a loved one, I have families as clients that have insured the younger family members within their household. But most importantly, the mother and the father or the parents in the household are definitely insured, specifically when they have dependents that rely upon them for food, clothing, shelter, and daily living activities.

(Credit: Ebony Ruffin)
(Credit: Ebony Ruffin)

So the biggest, the most important way to think about life insurance is what happens when you pass away, will someone be responsible for your burial expenses? Will someone be responsible for managing your wealth portfolio? Will someone be responsible for your debt? Life insurance tends to be a solution for those responsibilities.

How should you figure out how much life insurance you need?

How much insurance you need is typically defined. I would say, let's look at three different ways to determine how much life insurance you need.

There is the dime approach, which is debt, income, mortgage, and education. This approach primarily works for those parties that have someone that relies upon them financially, and also those who have taken on a mortgage. So the dime method — debt, income, mortgage, and education — says if something happens to me today or in the future, how much debt must be satisfied? How many years of income will my dependents need to continue their daily living? What is the mortgage balance and who will rely on me for education? So that is the dime approach.

I also think that while we may look at the dime approach to determine how much life insurance we might need, sometimes it's not necessarily how much we need, but also how much can we actually afford. Because, honestly speaking, life insurance is another bill in the household.

(Photo: Getty)
(Photo: Getty) (Thomas Barwick via Getty Images)

So, it means that you'll have to look at what is your household budget and how much of that can you allocate to life insurance. So that's more of a reverse engineering approach where it says I can afford a monthly premium between $75 and $100. What's the max amount of coverage I may receive with my budget?

Another approach can be for someone that is, let's say, young, healthy, and maybe does not have dependents. That person may say, well, I have time in life to get life insurance. No one is relying on me. Why should I get life insurance? That is actually a very important time in a person's life to acquire life insurance, because the cost of insurance is very inexpensive, purely based on age and superior health. That means that the life insurance company has looked at the mortality tables, and they know that someone that is young and healthily healthy is least likely to be in a higher risk class. And therefore a payout will not occur in the near, near future.

So I would say for those that maybe you're off into your first job, or you started your first business, you do not have dependents and you're single definitely, make it a priority to incorporate life insurance into your financial planning early on in life.

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