When we first hear the term “life insurance,” most of us question do why really need it? After all, wouldn’t it be nice to have a plan that provides benefits when we die? That might sound intriguing. But, if you’re in good health and believe that you have a lot of life left, is life insurance really necessary.
In terms of life insurance, there is no universal answer. In order to determine your needs, you should research the life insurance basics, as well as the various situation where life insurance does or doesn’t apply to you.
Do I Need Life Insurance?
To determine if you specifically need life insurance, you should ask one essential question; How would your death affect the people in your life financially?
The answer to this question is likely yes if you have people who depend on your income and you don’t have enough money to leave behind an inheritance.
If you die while your life insurance policy is in effect, an insurance company will pay specific people or organizations a death benefit as a result of the premiums that you’ve paid, aka a death benefit. Regardless of whether the beneficiaries are your spouse or children, this cash can be used to cover their financial needs, such as paying household expenses or paying off debt.
Furthermore, if you own a business, this can keep your business running. Or, you want to ensure that there’s a way to cover your final expenses, such as funeral costs.
In short, it’s imperative that everyone with dependents have a life insurance policy. And, the COVID-19 pandemic has only proven the importance of life insurance. In fact, from March 2020 to July 2020, the percentage of Americans who felt a “heightened need for life insurance rose from 49% to 58%”, according to a study by LIMRA.
Who Really Needs Life Insurance the Most?
Each individual’s situation will determine whether life insurance is necessary or not. To determine if you need life insurance, consider the following scenarios.
Parents (or those planning to have children).
“If you don’t make it home and someone relies on your income to live, you need life insurance,” Mark Williams, CEO of Brokers International, told Insider.
Life insurance is often bought in response to the birth of a child. People generally purchase life insurance for the purpose of accounting for their mortgage, education, and other expenses in the event of their death. You should consider life insurance now if you plan to have a baby within the next year or two, advises Tanza Loudenback and Ronda Lee.
Logan Sachon, a Policygenius expert, says you can still buy life insurance while pregnant if you are the breadwinner of the family. However, you will probably get the best rates if you take the medical exam before or after your pregnancy.
Spouses who provide most of the income.
There are other types of adults who might want life insurance besides adults who have young children. If your spouse relies on your income, then life insurance can provide a financial safety net. To determine this, ask whether your partner could handle recurring monthly expenses, like a mortgage, utilities, and groceries, on their own.
Particularly vulnerable to financial hardship are spouses who’ve been out of the workforce for a long time or don’t have the skills to be financially self-sufficient. If you pass away before they do, you should look into policies that have a generous death benefit to support their current lifestyle.
Although many employers do offer life insurance, it’s often not enough for your family to live comfortably on. Also, with these policies, the death benefit is typically equal to one year’s salary, although it can be more or less. And, if you leave the job for any reason, these policies are not usually transferable.
Caretakers.
According to the Caretaker Action Network, over 65 million Americans, or 29% of the population, provide care for ill, disabled, or elderly relatives or friends every year, spending 20 hours a week on average. Moreover, 1.4 million children aged 8 to 18 are caring for one or more adult family members; 72% of them are caring for a parent or grandparent, and 64% of them live with the care recipient. However, most people aren’t the sole caregivers.
No matter if you are caring for an adult child with special needs, an aging parent, or anyone else, life insurance will provide financial help so that they can continue to receive the assistance they need if you were to suddenly pass away.
Business owners.
Small business owners tend to think of themselves as hard-working, independent, and entrepreneurial. As you have gotten to where you are today, you have a team that depends on you. It’s for this reason that you shouldn’t brush off the idea of life insurance.
You can protect your business if you or another critical team member pass away by purchasing a key person insurance policy.
It’s essentially a life insurance policy where the policyholder is a beneficiary, and the company pays the premiums. Assuming the owner should pass away, his remaining employees can use the funds to pay creditors, look for a new executive, or even manage severance payments if the company is unable to continue operating
Furthermore, you can borrow against the cash value of a permanent life insurance policy in order to fund a retirement plan for your employees.
A life insurance policy can also help strengthen a business partnership by protecting key individuals or securing buy-sell agreements. As a business partner, you might buy a life insurance policy that pays out if you (or a key employee) dies. A prearranged price could be set to purchase the deceased business owner’s share at that point, or the cost of the death of a valued employee could also be covered with these funds.
Those carrying a great deal of debt.
Your estate is responsible for paying off most debts solely owned in your name — even after your death. In the event of a cosigner’s death, before the loan is cleared, the loan becomes their responsibility. Also, if you pass away with a mountain of debt, your estate may go entirely toward paying off creditors.
Additionally, if you default on your loan, your co-signers could face substantial financial consequences. In short, the proceeds from your life insurance policy can help repay your debts so that your heirs don’t have to stress over them.
You work in a dangerous or high-risk environment.
“At the end of the day, life insurance is risk management” to deal with “premature death, loss of income due to illness, orIn the event of a cosigner’s death before the loan is cleared, the loan becomes their responsibility. disability,” according to Silvia Tergas, a financial planner with Prudential.
A person working in a high-risk environment has an increased risk of death as compared to someone sitting behind a desk all day. A high premium is almost always associated with jobs in aviation, construction, firefighting, mining, oil and natural gas, and several other similar fields.
What if you have employer-provided group life insurance? Well, the coverage ends when you are terminated, resign, or retire. Also, group life plans may not offer enough protection. Typically, you should select a death benefit that is equal to 10 times your annual income.
Also, it’s more likely to become disabled if you work in a high-risk occupation. If you can’t work, disability insurance provides a paycheck. The majority of people do not have long-term disability insurance, although many people do have a short-term disability through their employer
Thrill-seekers.
If you’re an extreme sports enthusiast with a passion for thrills, you’ll probably be considered a higher-risk customer by most insurance companies. It’s actually similar to a high-risk job in that you pay more to be insured, but considering how likely you are to die from unnatural causes, it’s worth it.
If you have a thrilling hobby, such as rock climbing or scuba diving, you should disclose this on your insurance application, state Loudenback and Lee. In the event that you die within the first two years of your policy being active, and the insurance company wasn’t aware of your regular high-risk activities, the company may reduce your death benefit, or cancel it altogether.
In terms of cost, you’ll typically see an additional annual fee or a higher base premium. It’s recommended that you comparison shop if your hobby is considered high risk by an insurance company.
Empty nesters.
You don’t need to cancel your life insurance policy just because the kids have grown up and left to live their own lives. The money you have in your policy can be passed on to heirs such as your children and grandchildren.
Consider your spouse as well since he or she may need an income after you die. After all, would your current financial plan provide for them your spouse if they outlasted you for another 10 or 20 years?
You can also leave a legacy with life insurance policies, not just for the family and friends you love, but also for the organizations and causes that personally mean a lot to you.
An insurance policy payout can therefore be donated to a charity.
A survey by LIMRA, a financial services research and consulting organization, found that more than a quarter of Americans who own life insurance purchased it as a charitable gift. Giving this way can be a wise decision.
“Since life insurance provides a death benefit several times larger than the premium paid, it is a great way to boost your charitable giving,” says Chris Abrams, founder of Abrams Insurance Solutions, told Forbes.
Retirees.
When you retire, especially if you and your spouse have been able to pay off your house and set aside retirement income, you can kick back and relax. However, there may still be a need for life insurance to protect your heirs. Here are some scenarios to consider:
- You could provide funds for your family to pay the estate tax and other costs associated with your death.
- Retirees can spend their savings with peace of mind knowing that their kids will benefit upon their death when they have a life insurance policy.
- In some cases, retirees can use life insurance to equalize their estates. An example would be the parents of two sons and a daughter of a small-business owner. Life insurance policies payout death benefits to compensate family members who have not received the same share of the business.
Older adults without sufficient savings.
A person who is retired and does not have a large amount of savings to draw from might want a policy that pays for burial and funeral costs when they pass away. The average cost of a burial and funeral service in 2019 was $7,640, while cremations were $5,150, according to the National Funeral Directors Association.
Some insurance companies offer “final expense” policies, which are essentially whole life policies with a cash value component. They also don’t require medical underwriting. Compared to other whole life insurance policies for older adults, these policies are typically smaller and are just enough to cover your funeral costs.
Who Doesn’t Need Life Insurance?
There are some people who don’t need life insurance, contrary to health insurance.
The cost of life insurance can be prohibitive for some people – for example, those who nearing retirement or don’t have dependents who rely on you financially.
Life insurance premiums are paid to ensure that the person you designate as a beneficiary will receive a certain amount of money when you die. For many families, the monthly payment is a small cost to pay for the security of knowing their bills will be paid, debts eliminated, and daily expenses covered despite your presence.
In some cases, however, buying life insurance might not make sense based on your financial situation. Moreover, life insurance is usually not needed by the following three types of people:
You’re single, not a caretaker, and don’t have any dependents.
For someone who is single with no dependents, life insurance is probably unnecessary for now. Most financial experts recommend that people with finances supporting a spouse, children, or aging parents purchase life insurance.
That’s not to say buying life insurance if you’re single and don’t have dependents is a bad idea. After all, your chosen beneficiary will still get money regardless of who you designate. Nevertheless, it may make more sense for you to put the money you would use to pay the premiums elsewhere.
It may be wise to hold off on purchasing life insurance until you know how much coverage you need in case you have children or have to provide for elderly relatives.
There is one exception: you have debts that will not be forgiven when you pass away. In some cases, even in cases of death, borrowers of private student loans and mortgages have to repay the loans. A person who inherits your student or home loan debts is responsible for paying them if you have no cosigner or joint owner.
It is possible to purchase a cheap life insurance policy so that outstanding debt payments can be made when cash in liquid accounts is insufficient. For this situation, term life insurance is usually the best option as it’s cheaper and lasts for a specific amount of time.
Children and college students.
As a general rule of thumb, children and college students do not need their own life insurance policies. There is only one and highly unusual exception – child actors who support their families. Despite the policy holder’s status as an adult, the child can purchase a policy.
Life insurance policies for parents, grandparents, or other guardians most commonly cover kids and young adults. As a college student without financial obligations, there’s no real need to buy life insurance since youth is on their side.
Older adults.
While in some scenarios life insurance makes sense for retirees, the cost of life insurance typically increases with age — as a person’s health declines so does the premium. With that in mind, purchasing a policy later in life is rarely advisable. Noexam.com analyzed 80,000 insurance quotes and found that people in their 30s pay about $42 on average for life insurance. A person’s average monthly expense reaches nearly $145 by age 50, and over $200 by age 60.
It’s often better to establish a trust or name them as the beneficiary on your retirement accounts if you have heirs, rather than purchasing last-minute life insurance.
Do I Need Life Insurance FAQs
How much life insurance do I need?
Ideally, the death benefit of your life insurance policy should be at least 10-15 times your annual income. Don’t forget to factor in essential expenses such as child care costs, college tuition, and any debts that you have like student loans and a mortgage.
At what age should you get life insurance?
The moment you have dependents or shared debts, it’s advised that you purchase a life insurance policy. According to Ted Bernstein, Director, Life Insurance Concepts Inc., the premium amount typically increases by 8% to 10% for every year of age. “A 45-year-old male will pay on average $1,125 for a new, 20-year term policy with $1,000,000 of coverage,” he says. “The same policy purchased at age 46, will cost $1,225—and $1,345 a year if purchased at age 47.”
Ultimately, a policy that’s bought at a young age will cost you less over a long period of time.
Who doesn’t need life insurance?
Purchasing life insurance for your children is unnecessary because you do not rely on them financially. You may also be able to avoid getting an insurance policy if you’re retired and have no debts or dependents.
Again, life insurance is geared towards parents, spouses, caretakers, business owners, and those carrying a lot of debt — mainly student loans and a mortgage. For older adults, life insurance makes sense if your funeral would be a financial burden to others.
