Life insurance is a financial tool that provides a death benefit to your named beneficiary in exchange for premium payments to the insurance company and is chosen based on your needs and goals. While it’s never fun to think or talk about, considering the impact an unexpected death might have is an important part of planning for your financial future. This is especially true if there are other people who would be financially impacted by your death. If you don’t have any dependents (usually children) or a spouse, and you don’t have any debt that would transfer to someone else, you’re probably fine without life insurance. In fact your money would probably be better spent on other financial priorities. But if you do have people depending on you or a lot of debt that would fall on a loved one in the event of your death, here are a few things to ponder when considering life insurance.
Do you have a spouse or partner? Couples often depend on each other for financial and household support. Without your income, would your significant other be able to handle all of your current financial obligations? If the answer is no, a life insurance policy may be worth purchasing to help those you leave behind replace your lost income and try to maintain their same lifestyle. This is especially important in cases where one partner makes significantly more than the other and ongoing financial obligations depend on your combined income.
Do you have children? Who will provide for them? Life insurance is the best way to financially protect your family and help to pay for their future living costs and education. The proceeds of a life insurance policy could be used to set up a trust to pay their expenses over a period of time. You can also use a life insurance policy as a way to leave an inheritance for your children by adding them as beneficiaries to your policy.
Do you have debt and future obligations? If you die with debts, in most cases the debts do not go away. Your estate and/or family may end up owing them. The rules vary state-by-state and depending on the ownership of the debt itself. If you obtained a loan (mortgage, car, home equity loan, credit card, etc) with a co-signer, the remainder of that loan would transfer to whoever co-signed the loan with you. One of the few types of debt that is forgiven at death is federal student loans. They would be discharged (wiped away) upon your death, but most private loans would not.
Will your loved ones need help paying for your funeral? The average cost of a funeral is around $10,000 and most families aren’t prepared to cover that expense. If the assets you leave behind aren’t enough to cover your funeral costs, a small life insurance policy can be a big relief to your loved ones. They could use the proceeds to pay any final expenses, including funeral costs and any medical bills not covered by health insurance.
Do you own a business? If you own a part of a business along with several other people, life insurance can be set up in a way to fund a “buy-sell agreement”. This gives the surviving business owners the option to buy the deceased owner’s stake in the business at a pre-agreed upon price. It essentially allows the remaining owners to keep ownership of the business and the deceased’s family to receive compensation for their stake in the business without disruption.
As you can see, plenty of people may need some life insurance. How much and what kind do you need? It varies by person and by the estimate of your future obligations. There are several online calculators available that can help you determine a sufficient amount or you can discuss with your insurance agent.