Do You Need Life Insurance
Do you need life insurance?
Many people are not sure if they need it or how much they should buy. Here is a general guide to help in your decision.
Do you have dependents that depend on you for financial support? Are you the primary breadwinner of your family, or do you contribute more than one-third of the family income? If so, then yes, buying term life insurance is an investment in yourself and those who depend on your income. If not, then this may not be the best use of money for now. The key words here are dependent and primary breadwinner. If you are the primary breadwinner and your family income exceeds the projected cost of a term policy, then you will benefit greatly from a policy.
Do you have a college education? If so, then it may be time to think about buying term life insurance. A term policy is a low-cost way to help ensure that your beneficiaries get the education and training they need to succeed in life. By purchasing a policy now, you can help ensure that when your children go to college that they will not have to borrow large sums of money. This is especially important for young families whose wealth accumulates over time—a staggering 80% of all U.S. college graduates take out loans to pay for their education. If you have a medical condition, the cost of life insurance will be significantly reduced.
Will you receive a gift in the near future? If so, then you may want to consider buying a policy now and putting the money in an investment account. You may also want to consider an accidental death or dismemberment policy (AD&D) that provides coverage up to $250,000 (or the policy limits). Most term life insurance policies have AD&D coverage, and at least one of the top six U.S. life insurance companies has an AD&D policy with no deductible that offers a death benefit of $250,000.
Do you have a long-term care plan? If so, then you should be aware that the cost of buying term life insurance can be significantly reduced by purchasing a long-term care (LTC) policy instead. Many LTC policies are not terribly expensive if purchased right away—the cost can be as little as 1% to 2% of your annual income. LTC policies have a much lower cash value than term life insurance, and you may be able to get a revised policy at an even lower price. (For more information, see The Long-Term Care Market Is On the Rise.)
Do you want to spend less money on life insurance? If so, then term life insurance may be the way to go. Many young people who are saving for their first homes end up spending far more than they would like on a term policy because of the "numbers game." Most popular term insurance products sold today have rates that are well above their "approximate" rate. For example, a 30-year old male with a $100,000 annual income who wants to save for retirement could purchase term life insurance for anywhere from $22,200 up to $46,380. The cost of this coverage is based on the "approximate" rate ($46,380 x 1.05 = $51,080).
So yes, term life insurance is an investment in many ways; however it may not be the most useful thing you can invest your money in right now. If you are young and earning too much money for your family—or if you have dependents that rely on your income or savings—then a term policy may be right for you.
Related articles:
The Long-Term Care Market Is On the Rise
Life insurance is one of those financial products that can offer great benefits for your heirs. With life insurance, there are many reasons to keep the policy in place and valuable tax benefits that go along with it. Here are some points to consider. (For more information, see How Much Life Insurance Do You Need?)
How Much Life Insurance Do You Need?
The large majority of people buy life insurance policies because they don't have enough life insurance on themselves. An important part of financial health is knowing how much you need and when it's best to purchase or replace it.
The following are some options for figuring out how much life insurance you need:
Download the free budget spreadsheet (e-file only, 32KB) to help meet your financial goals. You can also download it as a PDF (e-file only, 32 KB). Don't have time for the Excel spreadsheet? Download the PDF version of this article instead.
Budget Your Income: If you have a budget for your expenses and what you plan to put into savings and investment accounts each month, then start by reviewing this budget. If there is room to make adjustments in your budget, then update it now so that you can see how much more money may be needed in savings and investments. This will help you know what you need to put aside each month to build your financial plan.
Budget Your Needs: If your budget allows you to consider how much money is needed for long-term needs such as retirement, pay down debt and home improvements, then start with this budget. By looking at what is best for your finances now and how much that would cost over the next 10 or 20 years, it may be possible to determine what a good amount of life insurance is for you.
Analyze Your Spending: Take a look at when your spending starts gaining traction and consider where the most room is in your budget. Once you have determined where you can make adjustment now, then update your budget to reflect these changes.
Analyze Your Assets: Analyze your assets to determine how much of a cushion you have in your savings, investments and home. Will adding another $100,000 to this buffer be enough? Or would adding $200,000 be wise? By taking a look at what is coming in versus what is leaving the nest each month and paying down debt or saving for a home improvement project and retirement, it may be possible to determine what you need each month in life insurance and other financial tools.
Determine What You Really Value: This is a critical step that many people miss out on when figuring out their needs.
Conclusion: Once you have determined what you can realistically afford each month in life insurance, retirement, savings and investments, then this information is included in your new budget. You should also come to terms with the fact that if you want to invest more than just the minimums or if your situation is different than most people's (e.g., a stay-at-home parent), then there are often other options available than life insurance. There are many ways to plan financially for your future and have peace of mind that the money will be there when it's needed most.
While you're going through this exercise, it might help for a board of advisors to work with you on this process.