Why Do You Need Life Insurance? In simple terms, life insurance gives you the security of knowing that your loved ones will be financially protected should you unexpectedly pass away. This feeling has real value – especially for those who have ever experienced the untimely death or critical illness of a family member. The monetary hardship that often comes in the wake of such trying circumstances only compounds the difficulty for the family members who have been left behind. Having a good policy in place can lift a huge financial stone off their shoulders.
But, life insurance is a complex topic. It’s not just a matter of do you need life insurance. It’s about finding the right policy to best suit your needs – now and in the immediate future. There are many variables that you need to consider before settling on a particular policy.
Why Do You Need Life Insurance?
To understand why you need life insurance, I’m going to walk you through some of the main points.
Ready? Let’s dive in…
First of All… How Does Life Insurance Work?
After the purchase of a life insurance policy, you begin making monthly premium payments to the life insurance company. In the event of your death, the insurer agrees to pay any beneficiaries you’ve listed a lump sum of cash. This money can then be used to lessen the financial burden of surviving family members, by paying the funeral costs, settling outstanding debts, and helping to cover their living expenses.
Another important point to know is that there is no such thing as a standard life insurance policy. Life insurance coverage comes in all shapes and sizes and can offer varying terms and conditions depending on a number of factors, such as who is taking out the policy, who is being covered, how much wealth is involved, and even in which country the policy is originated.
Do You Need Whole or Term-Based Life Insurance?
One important decision to make is whether to purchase a whole life insurance policy or term-based life insurance coverage. As long as you are paying the monthly premiums, whole life insurance covers you for your entire lifetime. Plus in addition to providing a payout, whole life insurance allows you to simultaneously build wealth that you can borrow against (not recommended!) or invest for growth. These policies are also known as permanent life insurance.
Term-based life insurance, on the other hand, covers you for a specific time period, anywhere from 5 to 30 years. In this setup, any life insurance that you buy will likely expire when you reach the age of 65 or 70. This means that after paying premiums for many years, once the term comes to an end, you will not receive a payout. But between the two forms of life insurance, term-based policies tend to be more flexible and less expensive. Some countries, like here in Israel, only offer term-based life insurance. It’s likely due to the fact that Israel does not currently have an estate tax like other countries.
Which brings me to another point…
Whole life insurance policies are a popular estate planning tool. If you currently live in the US or you live abroad, but are maintaining valuable assets in the US or some other countries, then your whole life insurance policy can help to offset future tax liabilities – expenses that can take a big financial bite out of the assets your loved ones are inheriting. If you purchase whole life insurance for tax reasons, as a general rule you will want to keep your policy in the currency of your future financial obligations.
How Much Do You Need Life Insurance?
The decision of which life insurance policy to purchase is largely dependent on where you are in your life cycle and takes into consideration several factors:
Are you single or married? Do you have kids?
Having life insurance is more important if you are married with small children, but even single people can benefit from coverage.
If you are on your own and don’t have any dependents, you may be able get away with having no life insurance at all or buying a small policy that will cover your funeral expenses as well as any unpaid debts you leave behind.
If you are a young family with small children, life insurance will likely be one of the main tools you’ll have to ensure your family remains financially stable should anything happen to you. As a general rule, the younger your kids are, the more money you should put into your life insurance policy. Once your children graduate from college, start earning an income, and begin to build their own wealth, your need for life insurance lessens.
By the time you reach late 60s-70s, life insurance has little to no value. At this stage of your life, your focus shifts towards your ability to sustain your desired lifestyle when you have little to no employment income. Why continue to pay for life insurance if you have other means of supporting your family in the event of your untimely passing?
Do you have debt?
After your death, any outstanding debt, such as credit card bills, medical expenses, and mortgages will get deducted from your estate. Another thing to keep in mind is that your co-signers on loans or joint-account holders will be held liable for any unpaid balances. If you have a significant amount of debt, then purchasing life insurance may make sense for your named beneficiaries even if you are single and don’t have any children.
How much money do you have?
How much money do you realistically have to put towards insurance? In some cases, it may make sense to get a lesser plan so you can use that money to save for a rainy day or to build your wealth instead of paying into a policy that you might never need. Go over your expenses to see what level of coverage you can really afford. Any policy needs to be evaluated to see whether it will truly fit your current needs.
How old are you? How healthy are you?
As a general rule, the younger and healthier you are, the lower the cost of coverage and the better your plan will be. The older and the less healthy you are, and the more that illness runs in your family, the more you can expect to pay for coverage that will also be of lesser quality.
Most policies have gradual yearly premium increases. By the time you reach your mid 50s, they can get quite expensive. This may mean that you will not be able to afford the same level of coverage that you had when you were younger.
In summary, life insurance is an important part of your financial management and wealth building activity. But, it’s not static and it’s not something you need throughout your lifetime. Make it a point to re-evaluate your needs every few years so you are truly getting the most for your money.