If someone would likely suffer a financial setback if you died, you probably need life insurance. It provides for your family financially after your death, replacing your income and helping your family pay for everything from funeral costs to college to daily living expenses.
Who Needs Life Insurance?
While most people could use some form of life insurance, there are a few classic scenarios in which you should never consider going without it.
1. Married Couples
What would happen if you or your spouse died? Would the income from the surviving spouse be enough to pay off credit card balances, car loans, monthly rent, and more? If there’s any question, you should consider life insurance.
2. Families With Kids
These days, most families rely on two incomes. If you passed away could your family continue their standard of living based solely on your spouse’s income? How would their plans change for large financial investments like college? Life insurance helps you makes sure those plans stay in motion, even on the surviving spouse’s income alone.
If you’re a stay-at-home parent, you also make a huge financial contribution to your family, even without bringing home a salary. Childcare, transportation, cleaning, cooking, and other household activities are all important tasks, and the cost of replacing them is often underestimated. With a life insurance policy in place, your family can preserve their quality of life.
3. Couples With Debt Or Mortgage
When you die, your debts are paid out of your estate, often greatly reducing what you’ll pass on to your spouse. If you have joint accounts with debts, your spouse will be responsible for them. Life insurance can make sure your spouse isn’t knocked off course financially.
Who Usually Doesn’t Need Life Insurance?
You might not need to worry about life insurance if:
1. You Have Plenty of Assets
Have you and your spouse amassed enough assets and income to independently care for yourselves? You might not need to worry about life insurance.
2. You Children Are Self-Sufficient Adults
It’s helpful to remember that the primary purpose of life insurance is to replace the future income of a primary breadwinner. This may not apply if your dependents have grown out of relying on you financially.
3. Estate Taxes Are No Longer A Concern
Your estate might be too small to owe estate taxes – or maybe you have enough liquid assets to pay any estate taxes. In these cases, you might be able to skip purchasing life insurance.
How To Assess Your Life Insurance Needs
1. Start With Your Longer-Term Needs
If you’ve decided you might need life insurance, ask yourself these questions to determine whether it would serve you in the long term.
- How much money would my dependents need to cover their living expenses?
Add up the earned income you bring to your dependents on a regular basis, then subtract the worth of property they would inherit from you and any funds from public sources, like social security or private insurance plans. You might also subtract any other likely sources of income, such as help from wealthy grandparents.
- How long would it take for my dependents to become self-sufficient?
If your kids are almost out of college, for instance, they may not need much additional income. If they’re younger, remember your dependent spouse can usually return to work at some point, and some children may get at least partial scholarships. You may determine that your dependents may not need much help from life insurance after all. On the other hand, if you have young children you may decide to purchase a reasonably-priced amount of life insurance.
2. Think Through Your Short-Term Needs
Now it’s time to assess whether you need life insurance for short-term needs. Ask yourself these questions:
- What assets are available to cover my dependents’ immediate financial needs?
Consider keeping some money in joint accounts or pay-on-death bank accounts. You might place marketable stocks in joint tenancy or register them on beneficiary (transfer-on-death) forms.
- After I die, how long will it take for my property to be turned over to my beneficiaries?
If most of your property will bypass probate and you have cash assets, you might have little need for insurance for short-term expenses. However, if most of your property is transferred by will and could be stalled in probate for months, your family and other inheritors could likely use the immediate cash from life insurance.
- Will my estate owe substantial debts and taxes after I die?
If your estate consists mostly of “non-liquid” assets (real estate, a share in a small business, jewelry, etc.), your survivors may lose a significant amount of money if these assets must be sold quickly to raise cash to pay bills.
Decided To Purchase Life Insurance? Keep 3 Things In Mind
1. Shop Around
This is a big life decision so take your time, get educated on the options, and speak to a licensed agent. Age, health, credit history, driving records, hobbies and lifestyle can all have big impacts on the cost of your policy.
2. Costs May Increase As You Age
Your premiums may increase as you get older. Although your situation may vary, the ideal time to purchase life insurance may be right now, while you’re as young and healthy as you’ll ever be.
3. Your Needs May Change
Review your life insurance policy on a yearly basis and as milestones come up in your life. Big life events such as getting married, purchasing a home, and having children are all factors in determining which amount of coverage is right for you.
*Disclaimer: Citywide Home Loans does not provide life insurance services or any other service apart from lending. You should always consult with your legal, tax and financial advisors to determine which strategy is the most suitable for your specific circumstances.