You’ve just gotten married, purchases your first house, and had your first child. Everything seems to be falling into place, when suddenly you’re struck with the thought about life after you’re gone. This is when you may find yourself asking, do I need life insurance? This is often considered “the backbone of financial planning” because of the sudden and unexpected affect it can have on you and your family’s finances. Having life insurance ensures protection from financial debt that could come with your passing by providing immediate monetary funds to help with funeral costs and anything debts you left behind. By buying life insurance, you’re paying off any future debt you’ve accumulated in the case of your own passing. You’re also giving your family financial support in the long run to help pay for mortgage, estate taxes, credit card debts, and loans.
A well-balanced financial plan has some basic defenses in place for unexpected events. Here’s a basic explanation of what life insurance is, how it works, and when you need to obtain a life insurance policy.
Is Life Insurance needed?
With life insurance, you pay a monthly premium to a company that will transfer a sum of money to your family members in the event of your passing. In other words, you buy a life insurance policy on yourself so that if you die, the company pays your policy benefit to your designated beneficiary such as your spouse, a parent, sibling or close friend.
There are many things to consider for life insurance and you may find yourself asking, do I need life insurance? Firstly, if you support a family, then you should definitely consider buying a policy. There’s a chance your family members may inherit property from you in the event of your passing, so one way to see how much life insurance you need to take out is to take a look at your income and subtract the property inheritance. You should also consider the age of your children; if they are adults making their own income, then you will not need to purchase as big of an insurance policy than if you have young children who cannot support themselves within the next decade.
Life insurance has two main people involved: the insured and the beneficiary. The insured is the individual whose life is insured, and the beneficiary is the individual who receives the death benefit from the life insurance policy.
There are many different types of life insurance. While many life insurance policies will only pay your dependents out if you die before a certain date, the whole-of-life cover will pay them out no matter when you pass. This is one of the mostly costly types of life insurances, however is beneficial if you have a mortgage to pay off which may not be finished by the time of your passing.
Joint life insurance is one of the cheaper options and is favorable if you’re a couple. However, this insurance policy only pays out in the event of the first person passing, not the second.
Renewable term insurance is provided for a fixed amount of time, and it can be extended. Decreasing-term insurance decreases in cost as time goes on, which is valuable if you’re currently paying for a mortgage and will pay it off over time. Because you’re paying off your mortgage, you won’t need as hefty of a life insurance policy in the long run when compared to if you’re just starting off with a new mortgage. On the other hand, you can choose increasing-term insurance, in the case that your debts increase over time and you will not be able to pay them off during your lifetime. Some jobs will provide death-in-service benefits to your family members should you die during your employment with the company.
Alternatively, term life insurance is a policy that has a set term and expires after the term is over. Whole life insurance is a permanent policy that doesn’t expire and pays out when the insured passes away. Depending on your needs and financial health, a term life insurance policy is best to start with in most cases. It’s cheaper and provides the coverage needed for a well-rounded financial plan.
When Do You Need This Insurance?
Life insurance is meant to cover the lost income of an individual, pay for debt expenses, pay off the mortgage of a house or loans of a car, and to provide for children and family members should you die before paying off your debts. If no one depends on your income for support, then you do not need to consider insurance. However, if you have children or support a disable child or adult, then you should consider buying this insurance.
Additionally, you should consider how quickly your family members will inherit any assets. If in the case of your death they will receive property immediately, then you won’t have to consider an insurance policy that provides for short-term expenses. On the other hand, if your property will take months to pass along, then you should consider an insurance policy that also covers short-term expenses. You should also consider any liquid assets you might have, or items that can be sold quickly for cash. If you have many items that can be sold quickly but at a great loss, called non-liquid assets, then you should consider a decent insurance policy to prevent this loss from happening.
Some common events and instances when you may need life insurance are:
Purchasing a house, having student loan debt, credit card debt, and car loans, are all common reasons that an individual may purchase life insurance. If you’re unable to pay off these debts during your lifetime, then purchasing an insurance policy is a good idea. You may want to consider the increasing-term insurance or whole-of-life cover if you have an immense amount of debt. This is especially important if you’ve just recently purchased a house and know you’re unable to pay it off within the next couple of decades.
Parents with young children
If you have children, one of the first questions you may ask yourself is do I need life insurance? One of the last things you would want to do is to leave your children with your own mortgage and bank debts to pay off. You may want to buy an insurance to prevent this from happening. This will leave your children with the appropriate financial support in the unfortunate event of your passing.
Pay for funeral costs
Funerals can be costly, so if you wish to leave your family with enough financial support for your funeral, then you should definitely buy life insurance.
Some people buy insurance for inheritance tax purposes. If you’re planning to leave money for your children after you die, keep in mind that bills can creep into the thousands so your children may receive significantly less than intended. With this kind of an insurance policy that covers taxes, your children will receive the money you intended.
If you provide for a disabled spouse or child
Also known as impaired-risk life insurance, it’s important to have backup if you’re taking care of an adult or child with a disability that negatively affects life expectancy or their health.
The Backbone To Financial Planning
In most cases, a basic term policy is a good idea as soon as you’re able to afford it. In other words, the earlier the better. Life insurance costs are cheaper when you’re younger, and generally only cost anywhere from $10 – $50+ for a basic term policy. This is dependent on your current health and your age.
The fact is that we will all pass away sometime and planning for such unexpected events can make or break the financial future for your family. If you have a decent life insurance policy in place, then you can have the peace of mind that your loved ones are left with enough financial support should you pass away unexpectedly.