There are many reasons why someone might need life insurance. The one reason that’s sold the most is that it will provide for your loved ones should you pass away. However, this isn’t the only reason why you should consider getting life insurance.
In this article, we’ll review the who, what, when, why, and how much of life insurance so you have all the facts to make an informed decision to the question, “do I need life insurance?”
Life insurance is defined as an agreement contracted between an insurer (insurance company) and a policy owner (you). This agreement guarantees the insurer will pay a specified amount of money if the insured passes away in exchange for premiums paid by the policyholder during their lifetime.
There are many types of life insurance available today. Most life insurance falls into two categories: temporary or permanent. Temporary insurance includes policies such as term life insurance. Permanent insurance includes policies like whole life insurance and universal life insurance.
So what life insurance do I need? This will depend on a number of factors — from your financial goals, current finances, debt to your dependents, health, and age. However, of all the types of life insurance, most people end up choosing between term life insurance and whole life insurance or a combination of both types of coverage. The other types of insurance have too many drawbacks with smaller return opportunities.
The short answer is that most everyone needs some type of life insurance policy. Death is inevitable which means all of us at some point will need funeral expenses and other miscellaneous death expenses paid — at the minimum.
But life insurance is more than just that. It’s a valuable financial tool to have in your toolbelt in addition to the peace of mind it will provide you and your loved ones.
Here are some common if/then statements to help you understand why all of the people in these roles should consider purchasing a life insurance policy.
If you’re a…
Then you might need life insurance to…
|Parent||Pay for your children’s expenses. Permanent life insurance accumulates cash value which can be used during your life to pay for expenses like college tuition and more for your children.|
|Spouse||Supplement your income for your partner and other family members. If you’re the sole income as a couple, then a life insurance policy can provide income replacement should something happen to you.|
|Student||Keep your student loans from being passed on to loved ones. Federal student loans are forgiven if a borrower dies, but private student loans are transferred to the loan’s cosigners. This means your cosigners would be responsible for paying off the rest of your debt.|
|Business owner||Keep the business running once you’re gone. A business can be named as a life insurance beneficiary, meaning an allocated portion of your death benefit can be used to fund the business, buy out other business owners or shares, and more.|
|Caretaker||Purchase new aid for the person you’ve been caring for. Whether you’re taking care of a relative, parent, or child, if something happened to you, a replacement caregiver would need to be found. A life insurance policy can help pay for one in this situation.|
|Person in debt||Pay off any outstanding debts. Like student loans, not all loans are forgiven if you pass away. Debts that are shared such as mortgages, car payments, and credit cards can be passed on to whoever shares them with you. Life insurance payouts can help cover these types of expenses.|
The early bird gets the worm when it comes to buying life insurance. The younger and healthier you are, the more affordable life insurance usually is. Buying life insurance as soon as you can, will allow you to lock in affordable rates. This means that you’ll pay much less for coverage than you would if you were to wait. Premium prices often increase by 4.5% to 9% every year. Plus, if you choose a participating whole life insurance policy, you can start accumulating cash value that you can use during your lifetime and even potentially earn dividends from the insurance company.
There are several popular reasons for buying life insurance. These include:
Buying life insurance provides a guarantee for your family should something happen to you and can even provide you with increased free cash flow to use during your lifetime. You can get both living and death benefits with certain types of permanent life insurance. Additionally, good policy designers can take into consideration your budget, needs, goals, and more to create a policy that is tailored to you at a price you can afford.
The answer to this question often relies heavily on your answer to why you’re purchasing life insurance. If you’re primarily getting life insurance to cover monetary needs that you provide for your family, most financial experts recommend 10 to 15 times your annual income. For example, if you make $100,000 a year, you would want to get a $1 to $1.5 million life insurance policy. However, this isn’t the only factor to consider when asking yourself how much life insurance do I need. Here are some other things to consider:
Income replacement is one of the most common reasons why people purchase life insurance. Your dependents, which can be children, a spouse, a relative you care for, and others, may solely rely on your income. Because of this, you’ll want to make sure your policy payout is enough to supplement your yearly income while also taking into consideration inflation.
Another thing you should consider is any outstanding debt that you have. Life insurance can be used to cover any debts so you aren’t leaving debts behind for your loved ones to have to pay. Outstanding debts can include student loans, mortgages, car loans, credit cards, or personal loans. Let’s say you had a $100,000 mortgage and $40,000 in student loans outstanding. Your life insurance policy should include $140,000 for this debt payoff also taking into consideration any interest that may accrue over time.
Less common but still important to consider if you’re buying life insurance to protect a business. If this is the case, you’ll want to include an amount in your policy to cover any expenses for the business legacy. To determine this amount, you’ll want to ask yourself questions like:
The answer to how much life insurance should you have will vary based on each individual’s circumstances, goals, and needs, but these factors are a great place to start when considering purchasing a policy.
The decision to buy life insurance is personal which is why we at Life Benefits offer life insurance policies personally designed for you. No matter what stage of life you’re in, we can help. Policies are designed directly in front of you using your specific numbers with consideration of your financial needs so you will know exactly what type of policy it is, how it is designed, and how it works.
Schedule a strategy session with us today to get a life insurance policy built to help you manage and plan your finances correctly.