Life Insurance: When Less Is More

Life insurance is not always necessary and may not be worth the cost. If no one is financially dependent on you, you may not need it. If you have enough wealth to cover your final expenses, you can also likely forgo it. However, if you have people who rely on your income, such as a spouse, children, or a business partner, life insurance can help them maintain their quality of life and cover expenses if you pass away.

If you have no dependents

Firstly, your life circumstances might change. You may not have any dependents now, but you could have some in the future, such as a spouse, children, or ageing parents who become dependent on you. If you take out life insurance when you are younger and single, you are more likely to get a lower premium. If you wait until you are older, or until you have dependents, you may find it more difficult and expensive to get the cover you need.

Secondly, life insurance can also act as a long-term investment option. Some policies, such as ULIPs, offer the opportunity to invest and grow your wealth. Life insurance plans can also provide tax benefits, as the premiums you pay may attract tax deductions.

Thirdly, life insurance can provide protection from critical illness expenses. If you suffer from a serious illness, you may be unable to work and face extensive medical costs. Life insurance policies can offer riders that cover critical illness expenses, protecting you from the financial burden.

Finally, if you have any debts that you have co-signed with others, such as a mortgage or loan, a life insurance policy could help pay off those debts so your co-signers are not left responsible for them.

If you have a tight budget

However, if you do need life insurance, there are ways to keep the costs down. Firstly, consider term life insurance, which is the most affordable option. Term life insurance provides coverage for a specific period of time, usually 10 to 40 years, and is designed to end when you are nearing retirement and have fewer financial responsibilities. The premiums are usually much lower than those for permanent life insurance, and you can choose the length of the term and the amount of coverage to fit your budget.

If you are still finding the premiums too high, you can reduce the coverage amount. While the rule of thumb is to have a death benefit equal to five to ten times your annual income, getting a smaller policy is better than having no coverage at all. You can also reduce the length of the term to bring down the cost.

Another way to keep costs down is to work with a broker, who will be able to shop the market and compare costs across different companies and their products.

If you have other plans to provide for your loved ones after your death

Create a Financial Checklist

Prepare a financial checklist that outlines your assets, liabilities, and wishes for your finances after your death. This checklist can include information such as investment and savings account numbers, retirement account data, mortgage and credit card debt, tax-related documents, and a list of people to contact. Keep this information organized, accessible, and up-to-date to ensure your loved ones can easily find and understand it.

Draft a Will

A will is a crucial document that declares your wishes for your assets and estate after your death. It specifies who will receive your assets, who will care for your dependents or pets, and any other details of your estate. A will helps to ensure that your assets are distributed according to your wishes and can prevent tension among family members during an already stressful and grieving time. Be sure to review and update your will periodically, and consider hiring a financial planner or attorney for assistance if needed.

Fill Out Beneficiary Forms

In addition to drafting a will, don't forget to fill out beneficiary forms for any accounts that require them. Beneficiary forms ensure that your wishes are carried out and can help your loved ones avoid complications due to state and federal laws that may interfere with your wishes.

Prepare for Funeral Expenses

Funerals can be expensive, and your loved ones may struggle to cover the costs. You can help alleviate this financial burden by preparing for funeral expenses in advance. Research the expected costs based on your preferences for burial or cremation, the type of service, and any other specifics. You can prepay for the funeral, add the expected amount to your life insurance policy, or save money in a dedicated account.

Share Your Final Wishes

Once you have prepared your will and other relevant documents, get them notarized and securely store them in a location known to a trusted relative or loved one. Communicate your preferences to them, so they know exactly what you want, and they don't have to stress about making difficult decisions on your behalf.

If you are single, financially independent, have no dependents, and don't own a business

One reason to get life insurance is if you have debt that you co-signed with others, such as a mortgage, car loan, or credit card debt. If you pass away, your co-signers will be held responsible for these debts, but a life insurance policy could help pay them off so your co-signers won't have to.

Another reason to consider life insurance is if you want to cover your end-of-life expenses, such as funeral and burial costs, which can average between $7,000 and $10,000. While life insurance through your employer may be enough to cover these final expenses, an individual term life insurance policy can provide additional coverage and peace of mind for your loved ones.

If you are young and single, you may also want to consider getting life insurance if you think you may have dependents in the future. Life insurance is cheaper to obtain when you are younger and in good health, and it can protect your insurability if your health changes and you become uninsurable later on.

Additionally, if you are a student with private student loans, life insurance can be beneficial. While federal student loans are typically discharged upon the borrower's death, private loans may not be forgiven, leaving any co-signers responsible for the debt. Life insurance can help ensure that your loved ones won't have to deal with these financial burdens.

Lastly, if you want to leave behind a financial legacy, such as making a charitable donation or setting up a scholarship fund, life insurance can provide a tax-free benefit to your chosen beneficiaries.

In summary, while life insurance may not be necessary for individuals who are single, financially independent, with no dependents, and no business, there are still valid reasons to consider purchasing a policy depending on your specific circumstances and goals.

If you've accumulated enough wealth to take care of your family upon your passing

• Tax Benefits: Life insurance death benefits are income-tax-free for your beneficiary, whereas leaving money behind in a retirement plan like a 401(k) or IRA would result in your heirs owing income tax when they withdraw the money. Life insurance can also help cover estate taxes, so your loved ones won't have to sell off assets to pay these taxes.
• Investment Tool: Life insurance can serve as an investment tool, especially for high-net-worth individuals. The cash value of permanent life insurance policies can grow over time and be accessed through loans or withdrawals while you're still alive. This can provide an additional stream of income or be used to pay for large purchases.
• Business Protection: If you own a business, life insurance can be used to fund a buy-sell agreement in the event of a partner's death. It can also protect your business from financial hardship if a key person in the company passes away.
• Wealth Accumulation: Life insurance can be used for wealth accumulation when set up correctly. The cash value of life insurance policies can remain stable and earn a steady rate of return over time. It also offers tax-deferred growth and tax-free access if accessed correctly.
• Peace of Mind: Life insurance can provide peace of mind, knowing that your loved ones will be financially secure in the event of your death. It can help cover funeral expenses, replace lost income, or provide for dependents' needs.

However, it's important to note that permanent life insurance policies with cash value, such as whole life insurance, tend to be much more expensive than term life insurance policies. The premiums are typically higher because the policy accumulates cash value and covers you for your entire life. Therefore, if you've already accumulated enough wealth, you may want to consider whether the additional cost of life insurance is worth the benefits it provides.

Frequently asked questions