Life Insurance: Who Needs It And Why?

Life insurance is a tricky topic, and the answer to the question of whether everyone needs it is not a straightforward one. The purpose of life insurance is to provide financial support to loved ones after one's death. It is intended to help beneficiaries cope with financial loss by mitigating the burden. However, not all financial situations necessitate this extra support.

People who have accumulated enough wealth to cover their final expenses and who do not have dependents can usually forgo paying for life insurance. On the other hand, couples, parents of young children, mortgage holders, business owners, and those who want to leave a financial legacy are advised to strongly consider purchasing life insurance.

The decision to buy life insurance is a personal one, and it is essential to assess your financial situation and future obligations to determine if it is the right investment for you.

Parents with dependents

The death of a parent can put children at a severe disadvantage, and life insurance can help ensure your children will be taken care of during the time in their lives when they depend on you. This includes costs such as childcare, extracurriculars, schooling, and higher education.

Life insurance can also help cover end-of-life costs, such as funeral and burial expenses, which average around $7,000 to $8,000.

If you are the primary earner in your family, your loved ones rely on you to survive financially. Life insurance can ensure the bills are taken care of while your beneficiaries take time to make necessary life adjustments.

When deciding how much life insurance to take out, you can use the DIME method:

• Debt: Calculate the total of all your debt (e.g. loans, credit cards, medical bills, etc.), excluding your mortgage. You may also want to include costs for end-of-life expenses.
• Income: Multiply your income by how many years your beneficiaries will likely need it. A good place to start is by multiplying your income by the number of years until your youngest child graduates high school. However, this amount may be larger if you have lifelong dependents.
• Mortgage: Check your statements to find the outstanding balance of your mortgage. If you have a second mortgage or HELOC, be sure to include that in your calculations.
• Education: If you have children, anticipate spending upwards of $100k to $150k for post-secondary education for each child.

After adding these up, subtract any current savings or life insurance policies you already have in place.

Couples with shared finances

A life insurance payout can also provide a buffer for grieving loved ones. If a surviving partner would like to take an extended work break to grieve their loss, an insurance payout can give them the breathing room to do so.

Couples should each have life insurance in case one passes away so the other can maintain the same quality of life. This is true even when both partners are employed and could survive on one paycheck. Some spouses or partners may want or need to take an extended break from work following the death of their loved one.

Life insurance is particularly important for couples with shared finances if they have children, as the death of a parent can leave children at a severe disadvantage. Life insurance can help ensure that children will be covered during the time in their lives when they truly depend on their parents.

People with large debts

If you have large debts, life insurance is something you should seriously consider. Life insurance can be a vital tool to protect your loved ones from inheriting your debts when you die.

There are two main types of life insurance: permanent and term. Permanent life insurance policies do not have an expiration date, meaning you’re covered for life as long as your premiums are paid. Term life insurance, on the other hand, only covers you for a set number of years and does not accumulate cash value.

If you have a large amount of debt, you may want to consider a permanent life insurance policy. This will ensure that your debts are covered no matter when you die. However, term life insurance may be a more affordable option, especially if you are young and healthy.

When considering life insurance to cover your debts, it is important to calculate how much coverage you will need. You will want to add up all your debts, including any loans, credit card balances, and mortgages. You should also consider any future financial obligations, such as your children's education.

Another option to consider is credit life insurance. This type of policy is specifically designed to pay off a borrower's outstanding debts if the policyholder dies. It is typically used to cover large loans, such as a mortgage or car loan. The payout of a credit life insurance policy goes directly to the lender, not your heirs.

Ultimately, the decision to purchase life insurance depends on your individual circumstances. If you have large debts that could burden your loved ones in the event of your death, life insurance can provide valuable peace of mind and financial protection.

Primary earners

Life insurance is a tricky topic, and while it is not a must-have for everyone, it is important to assess your financial situation and life circumstances to determine if it is something you need.

If you are the primary earner of your family, your loved ones are financially dependent on you, and your absence can cause a drastic change in their lifestyle. Therefore, it is recommended that primary earners strongly consider getting life insurance. This ensures that your family can maintain their standard of living if you are no longer around to provide for them.

• Income Replacement: Life insurance can replace your income so that your dependents can maintain their standard of living. It covers day-to-day expenses, such as rent, groceries, transportation, and other essential costs.
• Debt and Final Expenses: Life insurance can provide a death benefit to cover any outstanding debts and end-of-life expenses, such as funeral services and burial or cremation costs. This relieves your loved ones of the financial burden during their time of grief.
• Future Financial Obligations: If you have children, you may want to ensure they have funds for their education. Life insurance can help cover these future expenses.
• Mortgage and Other Loans: If you have a mortgage or other loans, life insurance can help your beneficiaries pay off these debts. This is especially important if you have co-signers who would be responsible for the remaining balance in the event of your death.
• Business Continuity: If you own a business, life insurance can help your family or business partners cover operational costs, business debts, or expenses related to transferring the business to your heirs or a buyer.

In summary, as a primary earner, it is important to consider the financial impact your death could have on your loved ones. Life insurance can provide them with the financial support they need to maintain their lifestyle, cover any outstanding debts, and plan for the future.

Business owners

As a business owner, you may want to consider taking out a life insurance policy to protect your company and your family. Here are some reasons why:

To Protect Your Family

Life insurance is crucial for anyone supporting a family, especially business owners who often carry more expenses and support more people. A policy can cover expenses in the event of your death and protect your family from any debts, replacing your income so your loved ones can maintain their standard of living.

To Keep Your Business Running

A life insurance policy can be used to pay off business debts, supplement cash flow and cover expenses needed to find your replacement if you die. It can also be used to fund a partnership agreement. If you have business partners, you likely have an agreement in place that gives the surviving partners the right to buy out your share of the business in the event of your death.

To Equalize an Estate

Life insurance can be used to ensure that your heirs receive an equal amount of money or asset value when you pass away. This is especially relevant for business owners with children or a spouse, where some will inherit ownership of the business and others won't. The non-inheriting family members can collect money from a life insurance payout, thus "equalizing" the payout for everyone.

To Fund an Agreement

If you have a plan in place to ensure financial stability for your company after your death, such as a buy-sell agreement, life insurance can be used to fund this. This type of agreement dictates what happens to each owner's share of the company if they leave and can include a financial transaction by the surviving owners to settle ownership.

Types of Life Insurance for Business Owners

There are several types of life insurance policies that business owners may want to consider:

• Term life insurance: The most common type of policy, term life insurance covers a set period, usually 10-30 years. It is straightforward and affordable, but does not build cash value.
• Whole life insurance: This type of policy provides protection for the policyholder's entire life, as long as premiums are paid. It offers peace of mind and has premiums that never change, with a portion set aside to build cash value.
• Permanent life insurance: Whole life insurance is one type of permanent life insurance, along with universal and variable universal policies. These policies offer tax advantages and allow you to raise or lower your death benefit and vary your premium amount.
• Key person life insurance: This type of insurance is designed to protect business assets rather than personal assets and is more applicable to larger operations. It can help keep the company afloat if a key employee dies or becomes disabled, covering the cost of recruiting and training a replacement.

How to Get Life Insurance as a Business Owner

The steps for buying life insurance as a business owner are similar to those for non-business owners, but you may need multiple policies to protect both your business and your family adequately. Here are the steps:

• Determine your coverage needs, including multiple policies if necessary.
• Comparison shop and get quotes.
• Choose an insurer and submit an application.
• Take a free medical exam.
• Consult with a financial advisor or insurance agent to manage the application process and ensure you have the right policies in place.

Frequently asked questions