Life Insurance can be one of the most important purchases you’ll ever make. Life Insurance pays insurance proceeds in the event of a tragedy. After the loss of a loved one, life insurance can help pay the bills, continue family business, and finance future needs like your children’s education, protecting your spouse’s retirement plans, and much more.
- Who Needs it?
If someone will suffer financially when you die, chances are you need life insurance. Life insurance provides cash to your family after your death. This cash (known as the death benefit) replaces your income and can help your family meet many important financial needs like funeral costs, daily living expenses and college funding. What’s more, there is no federal income tax on life insurance benefits.
- Most Americans Need Life Insurance
To figure out if you need life insurance, you need to think through the worst-case scenario. If you died tomorrow, how would your loved ones fare financially? Would they have the money to pay for your final expenses (e.g., funeral costs, medical bills, taxes, debts, lawyers’ fees, etc.)? Would they be able to meet ongoing living expenses like the rent or mortgage, food, clothing, transportation costs, healthcare, etc? What about long-range financial goals? Without your contribution to the household, would your surviving spouse be able to save enough money to put the kids through college or retire comfortably? The truth is, it’s always a struggle when you lose someone you love. But your emotional struggles don’t need to be compounded by financial difficulties. Life insurance helps make sure that the people you care about will be provided for financially, even if you’re not there to care for them yourself.
Which Scenario Are you in?
Married with Kids- If you suddenly died, could your family maintain their standard of living without your income? How about pay for future education and retirement plans? Most likely not. Life insurance makes sure that your plans for the future don’t die when you do.
Single Parent- As a single parent, you wear many hats. With so much responsibility resting on your shoulders, you doubly need to make sure you have enough coverage to save guard your children’s future.
Stay-at-Home Parent- Even if you don’t make an income, you could still have a large need for life insurance. Your contributions to the family are often severely underestimated. There are estimates that the childcare, transportation, cleaning, cooking and other household activities are all important tasks and there replacement value can be expected to be at least $40,000.
Married– When you’re married; you share a lot with your significant other, including financial obligations. If you were to die tomorrow, would your surviving spouse be able to pay off debts like credit & car loans, let alone cover the monthly rent and utility bills? Or if you are planning on having children it could be smart to start planning before-hand. Locking in cheaper rates and your insurability.
You Have Grown Children– As you get older, you might feel like your need for life insurance decreasing. This is true in some cases but, just because the mortgage is paid off and your kids are through college doesn’t mean you’re through the clear. What if your spouse outlives you for 10 or even 30 years? How can you ensure your spouse that they will be able to maintain the lifestyle you have worked so hard to maintain?
You’re Retired– Depending on the size of your estate, your heirs could be hit with a large estate tax payment; up to 45% of your estate. The proceeds of a life insurance policy are payable immediately, helping heirs to take care of estate taxes, funeral costs and other debts without having to hastily liquidate other assets, often at a fraction of their true value.
You’re a Business Owner– Life insurance not only protects your family, it also protects your business. What would happen if you, a fellow owner, or even a key employee died tomorrow? Life insurance can help fund a “buy-sell” agreement. This way the living owner receives full ownership of the business and the deceased’s family receives the cash. To protect a business against the loss of a key employee, a “key person insurance” payable to the company, provides the owners with the financial flexibility to either higher a replacement or work an alternative arrangement.
You’re Single– Most single people don’t need life insurance. However there are certain cases where it makes sense. If you are carrying on a significant amount of debt that would burden your loved ones, it could make sense. Also, life insurance premiums are cheapest when you’re young. Getting locked into a policy early can save you money over the years.
How much do i need
The answer isn’t really how much life insurance you need, but more how much money your family needs after you are gone. You can ask yourself a couple of questions to determine how much is fit for your family.
- How much will my family need to pay for funeral expenses and pay off any debts
- How much money will my family need to maintain their standard of living over the long run?
More specifically here is what most people would like to cover:
- Final Expenses- $15,000
- Outstanding Debt (other than your mortgage)
- Outstanding Mortgage
- College Funding Needs
- Total annual Income your family would need if you died today? For how many years?
- Minus any savings and current life insurance in-force
Term vs Permanent
The most affordable type of insurance when initially purchased is designed to meet temporary needs. It provides you with protection for a period of time or “term” of time. If you are to pass away in this term, your family would receive your benefit amount. This type of insurance makes sense if you foresee your need for insurance disappearing at some point in the future.
Permanent Insurance provides lifetime protection on one’s life. It’s not a question whether or not you will get paid out, but more a matter of when you will get paid out. Permanent insurance carries a cash value account and provides living benefits.
What is right for you?
Neither term nor permanent life insurance is better. They are used for different reasons and different financial goals. Often the combination of both term and permanent can be a good solution.