DR. WALLACE: I’m only 17, but my grandfather on my mother’s side of the family recently bought a life insurance policy for me! I’m pretty surprised by this since I’m so young and healthy right now. I could understand if he bought one for my grandma or even my mom and dad, but it shocked me that I was the person named on this policy!

Why do people buy life insurance policies and what are they good for? I thought only old people needed them. I’m interested in working in the business field someday, so perhaps I can use this situation as a learning experience going forward. I already know about loans, bank accounts and making interest and paying interest and so forth, but I don’t know the first thing about insurance except that everyone seems to have automobile insurance in case they become involved in a car accident.

What does life insurance do and why is it important? — Really surprised teen, via email

REALLY SURPRISED TEEN: Life insurance is a multifaceted industry, and there are many ways to acquire it for a multitude of reasons. Since you’re young and surprised by this topic, I’ll try to provide you with examples that you might hopefully relate to.

Although you don’t know much about life insurance, you probably have heard about Costco warehouse stores. Even Costco provides life insurance! Costco has a goal of providing products and services at great prices, so their involvement in this industry is designed to help their members as much as possible.

People need and use life insurance as a part of an overall financial plan. As a person goes through life, insurance becomes increasingly important. Marriage, buying a home and starting a family are all very important reasons to take out insurance in one form or another. Then someday retirement planning also factors in as well.

Costco recently mentioned a list of five top reasons that people purchase life insurance to protect themselves and their families:

No. 1: Income replacement

This helps a family or individual maintain their current lifestyle after a family member passes on.

No. 2: Mortgage payments

Insurance of this type can protect a family’s home and/or property.

No. 3: College tuition

Early investing can help budget future educational costs of college or vocational schooling.

No. 4: Payment of debts

Insurance can also be taken out to cover debts that would otherwise pass on to other family members.

No. 5: Care for parents

Insurance is available to plan for and fund retirement and assisted living care.

In your case, it’s possible that your grandfather has opted for a term life insurance policy for you, one that likely can garner cash value over time. This means that a portion of the premiums he pays can go forward to build up some accumulated cash. The larger the portion of the premium that goes toward cash value, the more that cash can compound and build over time.

If he indeed purchased this type of a policy, it’s conceivable that there could be a limited term to your policy and that a cash value may exist upon its completion. In any case, I suggest you use this opportunity to both thank your grandfather and to ask him to help educate you on insurance and why he feels it’s important to him and to your family.

Dr. Robert Wallace will answer questions from readers in this column. Email him at rwallace@galesburg.net.

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