Many people know that they may need life insurance, but they are unsure of why they need coverage or how much their death benefit should be. Life insurance is primarily used as income replacement to provide for your family or those who depend on you after you die. It can be used for other reasons as well, such as paying estate taxes, leaving an inheritance for a loved one, paying off the heirs of a business partner, or to cover any debts that you may have accumulated.
If you are asking yourself “do I need life insurance?”, first determine if someone will suffer financially when you die. Furthermore, learn the reasons that you may need life insurance as well as the ways to determine how much you actually need.
When You Are Single
When you are single, you may still need life insurance, but you will most likely not require as much coverage as you would if you are married with kids. First, you should have enough life insurance to cover your burial costs (funeral expenses, final medical bills) and to take care of any outstanding debts (student loans, car loan, and mortgage).
The need to cover your financial liabilities, debts and/or outstanding loans is especially important if you had your parents cosign any loans. Your policy will save them from becoming responsible for paying back the loan during their later years or retirement.
Additionally, if other people rely on you financially, such as a sick parent or grandparent, you will want to have a life insurance policy in place to help cover their medical bills, the cost of in-home care, and any other obligations. Individuals can also choose to leave a legacy gift for their favorite charity.
Finally, if you are planning on getting married and having kids someday, buying cheap term life insurance when you are young and healthy will allow you to take advantage of low rates now.
When You Are Married
Once you get married, you need to buy life insurance for your spouse. You will want to obtain enough protection so that the quality of the life you planned together can continue after you die. Remember that you qualified for your mortgage and car loans based on your combined household income – can your spouse cover those living expenses, plus credit card bills, alone?
You may want to cover your income contribution, similar to the amount you would choose if you had children. At the very least, you need coverage for your burial expenses and to pay off any debts that you have together, including your home or a small business.
If you are the only income-earner in the household, buy life insurance for yourself. If your spouse contributes, buy a proportionate death benefit amount on him/her.
Married With Kids
At the top of the list of “who needs life insurance?” are parents. Children change your life completely, and that includes the amount of life insurance you should have. When you are married with children, you must have enough to replace your income so that your children can have the opportunities you want them to have. You will need a death benefit that replaces your income, pays off the majority of your debts, covers college tuition, and provides a financial safety-net for your spouse.
If you and your spouse want to have more than one child, plan ahead and buy adequate coverage in advance. Again, rates are cheaper when you are younger and healthier, so if having more children in the future is a near-certainty, choose a higher death benefit.
While you are getting life insurance, take the time to create a will and choose guardians for your children in the event that you both pass away unexpectedly. This way, everything will be covered for your children, and you do not have to worry about them ending up in foster care.
When you are single with kids, you definitely need to have life insurance. Since you are the primary caregiver and breadwinner for your children, you must make sure that they are provided for on all levels. If you love your children and want them to enjoy personal and professional success, why leave their future to chance?
You will need to provide an estate or inheritance that takes
care of them as they grow up and pays for their college education. The rest, they should work hard and earn. It is also important to consider guardianship and where your children will go in the event that you die. Take the time to set this up now.
Unfortunately, stay-at-home parents often have little or no life insurance coverage. Many people mistakenly think that, because a stay-at-home mom or dad does not generate an income, that he/she does not need life insurance. However, in order to maintain a similar lifestyle, a family would need to hire someone to provide childcare, clean the home, cook, and manage other aspects of your children’s lives. The value of a stay-at-home parent is often underestimated, but financial experts peg the value of these services at over $40,000.
While you may not need as large of a policy as you would for the primary breadwinner of the family, you should still have life insurance in place. The death benefit payout should cover the costs of a housekeeper and childcare provider.
Empty Nesters – Grown Children
Many people assume that you can drop your life insurance once you are an empty-nester and your children are college-bound or graduated. Obviously, you will not have the same type of financial responsibilities that you did while your kids are still at home – at least you hope. However, you may not be ready for retirement, and your spouse may lose some of your retirement benefits if you were to pass away. What would happen if your spouse outlived you 10, 20, or 30 years?
If you still have a mortgage or large living expenses, you will want a long 30-year term life insurance policy to supplement your assets, retirement accounts, Social Security checks and savings.
Retired, Senior Citizens
Once you reach retirement, you are no longer working to earn a salary, but you should still be earning retirement income to cover your living expenses. Although some employee benefits transfer over when you retire, not all of them do. One example is your social security income – if both of you worked, then you will be getting two social security checks. However, once one spouse dies, the remaining spouse will continue to draw the higher amount of the two social security checks, yet it still may not be enough to cover all of their expenses.
In addition to the daily costs of living, did you know that, depending on the size of your estate, your spouse or heirs might be faced with an estate tax? If your estate is worth less than $5.25 million, you won’t owe any estate tax, but families who have assets greater than that threshold can use the proceeds from a life insurance payout to cover the average 45% estate tax. Instead of liquidating their investments, the death benefit payout takes care of estate taxes, medical bills, funeral costs, and other liabilities.
Finally, another benefit of a life policy is the ability to spend the money you’ve saved over a lifetime and still be able to leave your heirs an inheritance. Just remember that we are not recommending you go buy life insurance coverage at the age of 65 for any of these reasons. If your 30-year term life insurance policy is up for renewal at 55, these considerations might encourage you to renew for another 30 years, but only if the premiums are affordable.
Small Business Owners
A small business owner may choose to have life insurance in place to help cover the costs of the business and keep it running if he/she were to die unexpectedly. The death benefit could be used to fund pensions or retirement contributions for workers or pay severance for workers who may be out of a job if you die.
If you have a business partner, key man life insurance would allow you to buy out the partner’s ownership. The same policy can be used to insure any essential or key players in the company, whether he/she is an executive, director, or talented employee critical to your company’s financial success. These policies would need to be separate from any personal life insurance that you have.
If you’ve determined you need life insurance, the next step is to choose which type of policy is right for you.