03 Sep Do I Need Life Insurance
COVID-19 has renewed the awareness of our mortality and our need for life insurance. However, currently only about 52% of Americans carry life insurance and about half of those are underinsured by $200,000 or more. * Whether you are young or old, wealthy or living paycheck to paycheck, there can be good reasons for carrying life insurance. As a CERTIFIED FINANCIAL PLANNER™, we typically examine the life insurance needs of our clients when doing financial planning. Here are our top 5 reasons for making a recommendation.
1. Protecting your family – If you have dependents (or are planning on a family) you must think about the need for food, clothing, shelter, educational funding, and possibly home care for younger children. Household budgets are usually based on a two-income household; if one person dies unexpectedly, the remaining spouse may be unable to carry on with the same lifestyle with one income. Stay-at-home spouses also have a very important role to play in the household, typically providing childcare, meals, shopping, and cleaning. These services may all need to be replaced by paid providers in the event of their passing. Providing enough coverage for your beneficiaries can help ensure their financial goals will still be met – even after you are gone.
2. Coverage of debts and mortgages – Your mortgage, private student loans, auto loans, and credit card debt all live on even after you die. Therefore, to protect your spouse and heirs it is important to have enough insurance to cover any outstanding debt. This is especially important with younger couples who are in the early stages of their financial lives with higher debt balances. Additionally, you will want to consider enough insurance to cover funeral and/or medical expenses.
3. Protecting your business – Insurance policies can also be used to protect your business in the event of death. If you have ownership in a business, you want to make it as easy as possible for your partner(s) to buy out your business interests. Using the death benefit from the policy will help to fund the buyout of the buy-sell agreement and help ensure the continuity of the business.
4. Ensuring an inheritance – Life insurance can be used to fund an inheritance for your heirs and 66% of people purchase life insurance for this reason. Life insurance proceeds provide liquidity to an estate which can be particularly helpful if other assets (such as real estate or closely-held businesses) are difficult to sell. In a changing tax environment, one of the primary advantages of a life insurance policy is that death benefit proceeds are income tax-free.
5. Planning for a lifelong dependent – When you have a child or family member with special needs you most likely need to plan on care for them throughout their lifetime. One way of ensuring lifelong care is by working with an estate attorney to establish a Special Needs Trust and using life insurance as a funding vehicle. You can name the trust as the beneficiary of the insurance policy and assign a trustee to manage
So why is there a gap between the need for insurance and the actual purchase of it? Many people postpone the purchase of life insurance under the assumption that it is too expensive. Term life insurance is more affordable than you think and the best time to obtain insurance is when you are young and healthy. Some people believe that they have enough insurance through their employer, but this is rarely the case. The average large employer may offer life insurance at one time the annual employee’s salary; however, the income replacement need for this employee may be closer to 10- 15 times this amount! As a fee-only financial planning firm (that does not sell insurance), we can offer an objective analysis of your current situation and help you determine if and what amount of coverage is most beneficial for you.
*Statista Research Department, July 1, 2021, and LIMRA Survey.