Life Insurance – You Do It for Love
It’s called Life Insurance, but it could just as easily be labeled Love Insurance. Buying life insurance is really an expression of love. It lets loved ones know that you care so much that you’ve made plans to provide for their well-being…even after you’re gone.
So if protecting the ones you love is important to you, please spend a few minutes reviewing the information below. It explains who needs life insurance and provides tools to help you determine how much and what kind might be right for you.
If someone will suffer financially when you die, chances are you need life insurance. Life insurance provides cash to your family after your death. This cash (known as the death benefit) replaces your income and can help your family meet many important financial needs like funeral costs, daily living expenses and college funding. What’s more, there is no federal income tax on life insurance benefits.
Most Americans need life insurance. To figure out if you need life insurance, you need to think through the worst-case scenario. If you died tomorrow, how would your loved ones fare financially?
Would they have the money to pay for your final expenses (e.g., funeral costs, medical bills, taxes, debts, lawyers’ fees, etc.)? Would they be able to meet ongoing living expenses like the rent or mortgage, food, clothing, transportation costs, healthcare, etc? What about long-range financial goals? Without your contribution to the household, would your surviving spouse be able to save enough money to put the kids through college or retire comfortably?
The truth is, it’s always a struggle when you lose someone you love. But your emotional struggles don’t need to be compounded by financial difficulties. Life insurance helps make sure that the people you care about will be provided for financially, even if you’re not there to care for them yourself.
- Married with kids
- Single parent
- Stay-at-home parent
- You have grown children
- Small business owner
When you’re married, you share everything with your significant other, including your financial obligations. Many people mistakenly believe that they don’t need to think about life insurance until they have children. Not true. What it one of you were to die tomorrow? Even with the surviving spouse’s income, would that person be able to pay off debts like credit-card balances and car loans, let alone cover the monthly rent and utility bills. If you’re planning to have children, you’ll want to buy life insurance right away and not wait until the mom-to-be is pregnant. Some companies won’t issue a policy to a woman during her pregnancy. Since health complications sometimes arise, they’ll want to wait until after the baby is born to issue the policy. Buying insurance before a baby is on the way helps avoid this potential problem.
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You’re Married With Kids
Most families depend on two incomes to make ends meet. If you died suddenly, could your family maintain their standard of living on your spouse’s income alone? Probably not. Life insurance makes sure that your plans for the future don’t die when you do.
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You’re a Single Parent
As a single parent, you’re the caregiver, breadwinner, cook, chauffeur, and so much more. Yet nearly four in ten single parents have no life insurance whatsoever, and many with coverage say they need more than they have. With so much responsibility resting on your shoulders, you need to make doubly sure that you have enough life insurance to safeguard your children’s financial future.
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You’re a Stay-At-Home Parent
Just because you don’t earn a salary doesn’t mean you don’t make a financial contribution to your family. Childcare, transportation, cleaning, cooking and other household activities are all important tasks, the replacement value of which is often severely underestimated. Surveys have estimated the value of these services at over $40,000 per year. Could your spouse afford to pay someone for these services? With life insurance, your family can afford to make the choice that best preserves their quality of life.
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You Have Grown Children
As the years go by, you may feel your need for life insurance has passed. But just because the kids are through college and the mortgage is paid off doesn’t necessarily mean that Social Security and your savings will take care of whatever lies ahead. If you died today, your spouse will still be faced with daily living expenses. What if your spouse outlives you by 10, or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?
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The need for life insurance can persist much longer than you might realize. Indeed, there are many reasons why you might want to be insured well into your retirement years and maybe even for your entire lifetime. For instance, some retirees still have financial dependents, such as disabled adult children. Many retirees also still have financial obligations, such as the mortgage on a home or second home, that could become burdensome on surviving family members when they die. Life insurance also can help ensure that your estate will be passed on, intact, to your survivors. A policy’s death benefit can help pay estate taxes and other final expenses when you die. Finally, life insurance can help you leave a legacy for your children and grandchildren even if you use up most of your assets during your lifetime.
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You’re a Small Business Owner
Besides taking care of your family, life insurance can also protect your business. What would happen to your business if you, one of your fellow owners, or perhaps a key employee, died tomorrow? Life insurance can help in a number of ways. For instance, a life insurance policy can be structured to fund a "buy-sell" agreement. This would ensure that the remaining business owners have the funds to buy the company interests of a deceased owner at a previously agreed upon price. That way, the owners get the business and the family gets the money. To protect a business in case of the death of a key employee, "key person insurance," payable to the company, provides the owners with the financial flexibility needed to either hire a replacement or work out an alternative arrangement.
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Most single people don’t need life insurance because no one depends on them financially. But there are exceptions. For instance, some single people provide financial support for aging parents or siblings. Others may be carrying significant debt that they wouldn’t want to pass on to family members who survive them. Insurability is another reason to consider life insurance when you’re single. If you’re young, healthy and have a good family health history, your insurability is at its peak and you’ll be rewarded with the best rates on life insurance. If you anticipate a need for life insurance down the road (e.g., you’re the marrying type) and you can fit the premiums into your budget, it might make sense to lock in coverage while you’re young and single. Doing so can eliminate the worry of having to qualify for coverage when you’re older and maybe not as healthy as you once were.
The answer isn’t really how much life insurance you need, it’s how much money your family will need after you’re gone.
- How much money will my family need after my death to meet immediate expenses, like funeral expenses and debts?
- How much money will my family need to maintain their standard of living over the long run?
Life insurance proceeds can help pay immediate expenses including uncovered medical costs, funeral expenses, final estate settlement costs, taxes and other lump-sum obligations such as outstanding debts and mortgage balances. They can also help your family cover future financial obligations like everyday living expenses, money for college or your spouse’s retirement, and so much more.
But how do you know if you need $100,000, $500,000, $1 million or more? The most common way to determine your life insurance needs is by conducting what’s called a Capital Needs Analysis.
Here’s how it works. Start by evaluating your family’s needs. Gather all of your personal financial information and estimate what your each of your family members would need to meet current and future financial obligations. Then tally up all of the resources that your surviving family members could draw upon to support themselves. The difference between their needs and the resources in place to meet those needs is your need for additional life insurance (see diagram below).
This may look simple enough, but calculating one’s life insurance needs can actually get pretty complicated. To make it easy for you to get a general sense of your needs, check out our life insurance needs calculator. It’ll walk you through the process and provide you with an estimate of your insurance needs in a matter of minutes.
But remember, our calculator (or anyone else’s for that matter) is no substitute for the guidance and assistance you’ll get by meeting with a qualified insurance agent or other financial professional. So if you’re serious about protecting your family’s future, contact an insurance professional in your community.
There are many kinds of life insurance, but they generally fall into two categories: term insurance and permanent insurance.
Term insurance, the most affordable type of insurance when initially purchased, is designed to meet temporary needs. It provides protection for a specific period of time (the “term”) and generally pays a benefit only if you die during the term. It is often a good choice for people in their family-formation years, especially if they’re on a tight budget, because it allows them to buy high levels of coverage when the need for protection is often greatest.
Term insurance is also a good option for covering needs that will disappear in time. For instance, if paying for college is a major financial concern but you’re pretty sure that you won’t need life insurance coverage after the kids graduate, then it might make sense to buy a term policy that’ll get you through the college years. If you buy a term policy only to realize at the end of the term that you still have a need for life insurance, the good news is that many policies will give you the option to renew your policy. The bad news is that you may face higher costs since age is one of key factors used to determine life insurance premiums. If your health has deteriorated significantly, you may find that coverage is no longer affordable. So if you’re considering a term policy, make sure you carefully consider how long you’ll need the coverage. If you’re pretty sure that your needs are temporary, then term insurance is probably the right choice. But if you think there’s a possibility that you might need the coverage for a long time, then you might want to include some permanent life insurance in your financial plans.
Permanent insurance provides lifelong protection, and the ability to accumulate cash value on a tax-deferred basis. Unlike term insurance, a permanent insurance policy will remain in force for as long as you continue to pay your premiums. Because these policies are designed and priced for you to keep over a long period of time, this is probably the wrong type of insurance for you if you don’t have a long-term need for life insurance coverage.
Why would someone need coverage for an extended period of time? Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plans, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? Another key characteristic of permanent insurance is that it includes a savings component, often referred to as “cash values.” These accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, and can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you’re using the policy’s cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash-surrender value.
It’s impossible to say which type of life insurance is better because the kind of coverage that’s right for you depends on your unique circumstances and financial goals. Often, a combination of term and permanent insurance is the right solution.
When you die, your family won’t care what type of life insurance you had, which company you purchased it from, or whether your policy included any special riders or provisions. They’ll only want the answer to one simple question: Is there enough?
Unfortunately, the biggest mistake people make when buying life insurance is that they buy less than they need. The average adult American has roughly $170,000 in life insurance coverage, or about four times his or her annual income. Sounds like a lot, but imagine if that money had to pay for a funeral, retire credit card balances and other debts, support your loved ones for many years to come, and help cover college costs. Would it be enough? How would you know?
The nonprofit LIFE Foundation offers a life insurance needs calculator that can provide you with a general sense of how much coverage you need to protect the ones you love. It only takes a minute or two to go through the calculation. And if you find out that you need more coverage than you currently have, take action soon because there are no do-overs with life insurance. You won’t get a chance to change your mind when you’re gone.
Once you’ve determined that you have a need for life insurance, you then need to decide where to buy it. And this is not a decision you want to take lightly. After all, purchasing the right amount and kind of life insurance might end up being the most important financial decision you’ll ever make.
So what are your options? Because so many variables are involved in figuring out how much and what kind of life insurance to buy, it shouldn’t come as a big surprise that most people prefer to buy life insurance through an insurance agent or other financial advisor. A good agent will take the time to carefully assess your financial situation and long-range objectives, and then work with you to find the right products for your specific needs.
Obtaining life insurance through your employer is another option to consider. Many employers, especially larger ones, offer their employees a group insurance benefit. With these plans, employees are typically provided with a “basic” life insurance benefit, often equal to one to two times their base salary or a lump sum such as $20,000. While this is a nice benefit to have, insurance experts believe that most people need more coverage than that. In most group plans, employees are given the option to purchase additional coverage. If your employer does not provide group coverage, it may make a life benefit available to you on a voluntary, employee-paid basis. While you pay the full cost of the benefits under a voluntary arrangement, there are several advantages to buying insurance this way. Voluntary plans help workers get coverage more easily than if they were to purchase an individual policy on their own and you can sometimes purchase coverage affordably .
A third option is to buy coverage directly, via the Internet or a call center. Many of the services that sell this way are brokerage agencies, meaning that they have contractual relationships with, say, 10 or 20 companies and they’ll broker your case with the company that offers the best product for your specific needs and circumstances. The better services won’t allow you to complete the purchasing process until you’ve spoken with a licensed and qualified insurance agent.