Intro to Insurance: Life Insurance
life insurance is designed to provide financial security for relatives of the deceased, most commonly spouses and children. If you support someone with your income or your time – and they won’t be able to provide that support for themselves without you – then you need life insurance.
Many people don’t realize how important life insurance is; they are more concerned with saving and investing for retirement than they are with making sure they have enough life insurance coverage. (While a retirement nest egg will certainly help your family, it will likely provide nowhere near the amount of financial support that an insurance policy could. Plus, early retirement account withdrawals may be subject to penalties and taxes, whereas life insurance proceeds are tax free.
Another barrier to getting adequately insured is that many consumers, even Millennials who would probably easily be able to obtain coverage, don’t even try to get life insurance because they don’t think they will qualify, according to LIMRA, a life insurance research and consulting company. Consumers also tend to significantly overestimate how much life insurance will cost, LIMRA has found. Don’t assume that you won’t qualify or can’t afford it; actually apply with several companies to see what’s available to you. (For background reading, see The History of Insurance in America.)
Who Needs It?
While it is possible to purchase life insurance for a child, it is generally unnecessary. Life insurance is supposed to make sure that anyone who depends on the insured for income or day-to-day support will be financially provided for when the insured dies. Children are rarely responsible for this level of support. Companies sell life insurance for children under the premise that parents will need it to pay for burial expenses if their child dies prematurely, that it’s a good way to save for a child’s future, and that it’s a good idea to insure your child now in case he or she becomes uninsurable later due to a serious childhood illness. But families can set aside money in savings to pay for burial expenses or plan to use their emergency fund to cover such a worst-case scenario. And there are better ways to save for a child’s future, such as custodial accounts and 529 plans. What’s more, the odds of becoming completely uninsurable before the age of 18 are slim. (For more on life insurance for kids, see The Pros of an Endowment Life Insurance Policy.)
Young adults often do not need life insurance either because no one depends on them. However, the argument for purchasing life insurance as a young adult becomes more compelling if that individual plans to get married and/or have children. The younger and healthier you are when you buy life insurance, the less expensive it is. (For related reading, see How Age Affects Life Insurance.)
Further, some young adults may find that it makes sense to buy life insurance so that, if they die, there will be money to pay off their private student loans if they have a cosigner such as a parent who would struggle to pay the bill if it became their responsibility. Private student lenders do not necessarily discharge loans in these situations. ederal student lenders do; the only financial liability for the loan after death is that the deceased’s estate will be responsible for taxes on the amount of debt that was forgiven.
Adults who have children should almost always carry life insurance because without the adult’s income and caregiving, the child has no means of support. In a two-parent household where one parent is the breadwinner and the other raises the children and cares for the home, both parents should purchase life insurance because the loss of either would represent a significant blow to the household finances. Without the homemaker, the surviving parent would have to hire someone to care for the children and the home, which would be a significant expense.
Married couples or long-term partners who do not have children and do not plan to have children may or may not need life insurance. It depends on how much each partner relies on the other for financial support, and what assets and financial obligations one partner would leave the other upon death. Couples should also consider what expenses would be eliminated if one of them were to die unexpectedly.
How Much Life Insurance to Purchase
You’ll often hear that you need to purchase a particular multiple of your annual income in life insurance. A more detailed way to think about how much you need is to base the amount of insurance you purchase on the liabilities you want to cover, which may include the following:
– mortgage debt
– student loan debt
– automobile loan debt
– credit card debt
– final expenses (funeral, burial, etc.)
– funds to support children from their current age through college graduation
– funds to pay for a child’s wedding
– funds for childcare and homemaking
This method takes more effort but will give you a more accurate result. You don’t want to pay for more insurance than you need, nor do you want to fail to carry enough insurance to fully protect your loved ones. (For more insight, see How Much Life Insurance Should You Carry? and Five Life Insurance Questions You Should Ask.)
In the next section, we’ll discuss the different types of life insurance you might consider purchasing.
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