If you’re like most people, you probably have several insurance policies in place. From health insurance to homeowners or renters insurance, having the right policy can help protect you in the event of a medical or financial hardship. However, many people are reluctant to think about their need for life insurance. After all, why worry about something that won’t be useful until after you pass away?
The reality is life insurance isn’t right for everyone, but there are circumstances where having life insurance in place as a sort of emergency fund makes financial sense. It’s an important tool if you have loved ones who depend on you and your income, or if you have outstanding debts that will pass on to someone else when you pass away. Below is some basic information about life insurance coverage and how you can tell if life insurance is a good investment for you.
Should I get life insurance?
Life insurance is a financial tool everyone should consider buying, but that doesn’t automatically mean it’s the right fit for every person or family. Life insurance is only worth it if it helps you offset financial risk for your loved ones after you die.
If you’re single and have no dependents, life insurance may not be worth it. However, for those who have dependents or debts, life insurance is likely a worthwhile investment.
The first step to figuring out whether you need to buy life insurance is figuring out who needs it in the first place. Below are five profiles of people at different stages of life and a breakdown of whether life insurance is necessary for them.
The student with debt
If you’re like most students or recent graduates with significant student loan debt, life insurance may be appropriate for you. It depends on who else may be on the hook if you pass away.
For instance, federal student loans are discharged upon death, so life insurance wouldn’t be required to pay them off after the borrower passes. Some private student loan lenders, however, may not offer a death discharge — especially if you were required to have a cosigner. If you’d rather not leave your parent, spouse, or other family members on the hook for your private student loan balance, life insurance could come in handy.
The well-paid bachelor
If you’re young, earn a sufficient income, and have little to no debt, you’re unlikely to have a huge need for life insurance coverage. No one is depending on you to provide income for their living expenses, so there is little to no financial risk should you pass away.
The young parents
For young families, decades of parenthood lie ahead. Minor children need all the financial assistance they can get, from putting food on the table and childcare costs to school and medical expenses. If you were to pass away, your children would still need these expenses covered, so life insurance is necessary for them to be cared for in your absence.
The new homeowner
New homeowners have a lot to be excited about, most importantly the ability to call a place their own. However, a new home often comes with a significant amount of debt in the form of a mortgage. If you were to pass away, your loved ones might not be able to keep up with the mortgage payments, or they may be forced to sell the property to cover other financial needs. For these reasons, life insurance for a new homeowner is definitely worth it.
The parents with college-bound kids
If you’re about to send your children off to college, life insurance may not be at the forefront of your mind. However, for parents who are planning to pay for the cost of education for their children, life insurance can help their kids continue with their education if they pass away. When children plan to cover their own education costs — or if they’ve already landed a job post-graduation — life insurance may not be necessary.
These are just a few of the possible situations you may find yourself in. But once you’ve decided you do need life insurance, you have to figure out how life insurance works and which type to get.
How does life insurance work?
There are several different types of life insurance, including whole life, term, and universal. Some policies, like term insurance, are fairly straightforward but offer temporary coverage. Others, such as whole or universal life, mix an investment component and insurance together in one policy known as cash value life insurance. These are more complex but offer permanent insurance coverage.
Deciding which type of life insurance you need for peace of mind can be challenging, but it starts with understanding how the two broad types of insurance work.
The two most common types of insurance are term and whole life. Like universal life insurance, whole life is a type of permanent life insurance that provides a guaranteed death benefit at the end of your life, so long as you pay your premiums. Whole life insurance helps cover final expenses, such as outstanding debts, burial costs, or other financial obligations passed down to your loved ones, such as potential estate taxes.
Because a whole life policy is permanent, the costs can be far higher than a term policy. Depending on the amount of coverage, your health, and your age at the time of application, a permanent policy can range from $50 per month to several hundred dollars per month. For example, a 35-year-old male in excellent health could pay around $517/month in life insurance premiums for $500,000 in whole life coverage.
Term life insurance differs from whole life insurance in that it is temporary coverage. With a term life insurance policy, you select an amount of insurance to help cover decreasing financial needs over a certain amount of time. These needs may include a mortgage balance, student loans, or expenses for a minor child. The general idea is that these financial needs diminish over time, so life insurance is only needed temporarily.
Term policies are generally sold for 10-, 20-, or 30-year increments, with fixed premiums for the life of the policy. A 20-year term policy for $250,000 for a healthy 30-year old can cost less than $14 per month. Like whole life insurance, the cost of a term life policy is based on your age, the amount of insurance you want or need, and your health status when you submit an application.
How much life insurance do I need?
The amount of life insurance you need depends on why you need it in the first place. Most financial experts suggest having five to 10 times your salary in total coverage if you are looking to replace your income for beneficiaries. If you are trying to cover outstanding debts, like a mortgage or future college tuition, your coverage should take those numbers into account.
Everyone is different, so how much money you need in life insurance coverage you put in place is specific to your financial needs. An online life insurance calculator or an insurance agent can also help you crunch the numbers based on your situation.
Answering the question, “Is life insurance worth it?” is not always an easy task. However, knowing what life insurance can be used to pay for can help you start the process. If you have financial obligations that will pass on to someone who depends on you, making sure you have enough coverage from your life insurance company is vital. If you have minimal debts or obligations for covering financial needs for anyone else, life insurance probably isn’t necessary.
Source: MSN Money
Dropping life insurance coverage may seem risky, but there are times when it makes good financial sense.
The main purpose of life insurance is to support dependents when you die. If others no longer rely on your income, the money you spend on premiums could be put to better use — perhaps spent on day-to-day living expenses or saved for retirement.
If you keep a policy that you no longer need, you’re wasting money.
Following are circumstances in which you might be better off without life insurance.
1. You’ve found a better deal
The life insurance industry is competitive, so it pays to comparison shop.
To protect your dependents, don’t cancel your old policy until you’re certain that the new one has taken effect.
Also, check the financial strength of any insurer you do business with. The Insurance Information Institute’s website explains how to contact financial rating agencies and what you should know about their ratings of insurance companies. A less-expensive policy won’t be a good deal if there’s no payout when you die.
2. It’s time to cash out your whole life policy
There are two types of life insurance, term and whole life.
Term life insurance lasts for a fixed period, but it is cheaper.
Whole life insurance provides coverage for your entire life but is more expensive. It also includes a savings component that grows over time. You can borrow against or cash in that savings.
If you are approaching retirement and have a whole life insurance policy that you purchased when you were younger, your best financial bet may be to cash it in.
3. You’ve gone through a divorce
When people cut marital ties, they often need to make new financial plans. If you purchased a life insurance policy to provide security for a spouse, there may be no reason to keep it once the marriage is dissolved.
4. You need long-term care insurance
At some point, you may decide that the money you’re spending on life insurance would be better spent on a long-term care insurance policy. This type of policy helps pay for nursing homes, assisted-living facilities or home health care if you need help with daily tasks, such as eating and dressing. These expenses typically aren’t covered by health insurance. If you plan to buy a long-term care insurance policy, consider doing so before you develop age-related health problems that could increase the cost of the policy. If you need help deciding whether you need long-term care coverage, consider seeking advice from a fee-only financial planner who won’t steer you toward an insurance company that he or she works with.
5. Your children are grown
Typically, people have the greatest need for life insurance from their 20s or 30s through their 50s or 60s — when financial demands often are the greatest. In addition to raising children, people in this age range often are paying off mortgages and setting aside money for their children’s college educations. If a family’s main wage earner dies at this stage of life without life insurance, the home can be lost and any plans to send children to college may be canceled or postponed. However, as people age into their 50s and beyond, children grow up and associated financial pressures tend to diminish or even disappear.\
6. You’re self-insured
Some people are so financially secure that they don’t need a life insurance policy.
If you’re able to set aside enough money to provide for your dependents after your death, you have no need for a life insurance policy. This is called self-insuring. Before you decide to self-insure, make sure you truly have enough money in reserve to pay for your dependents’ needs. If you have children, you’ll need to set aside enough money to support them until they complete their educations and become financially self-sufficient. If you have a spouse, he or she will need enough money to maintain a home and lifestyle after you’re gone.
7. You need a smaller policy
The amount of life insurance coverage you need can diminish over time. If your children are grown and your mortgage is paid off, perhaps you only need a small payout to cover final expenses when you die.
If you’re considering dropping a life insurance policy for a smaller one, use a free online life insurance calculator to help you determine the amount of coverage you need.
Source: MSN Money