Think You Don't Need Life Insurance? Read This First!
Key Ideas
- Life insurance is a tool to manage the risk of a premature death.
- There are several reasons why life insurance is important—here are the top 10.
- Life insurance is best when it's part of a comprehensive financial plan.
Close your eyes for a minute and think about what would happen if you had an unthinkable accident and died today.
Would your loved ones have money to pay for your funeral?
Do they have enough cash on hand to get through the next few months?
How about the next five years? Ten years?
Would they face the possibility of losing their home?
Would your kids, if you have them, still be able to go to college?
When you have a family to support, questions like these make it obvious that, yes, life insurance is important.
However, most people still wonder if it's worth the expense. After all, who wants to shell out their hard-earned money to pay for something you hope you never use?
Is Life Insurance Worth It?
Life insurance is worth it because it serves as a tool to manage the risk of dying prematurely—whether you currently have a family or not!
According to the actuarial tables put out by the U.S. Social Security Administration, 15% of American men and 9% of American women will die before the age of 60.
If you have a spouse or children, do you want to take the chance that you could die and leave them without your income—as well as the unexpected expense of your funeral and other final bills?
Even if you don't have a family to support, things get even more complicated. Sure, cousin Bob, the newly-licensed insurance agent, has told you that you really need life insurance (purchased from him, of course). But is that actually true?
The answer is… maybe.
Even if you don't have any dependents or you already have life insurance coverage through work, it might still make financial sense to purchase a separate life insurance policy.
There are actually many uses for life insurance. Those who fail to understand how life insurance fits into their financial plan can end up inadvertently creating a financial crisis when they pass away.
While you may find that you truly don’t need life insurance, understanding the many different reasons why it’s important can help you make an informed decision.
Keep reading to learn about the top ten reasons why people need life insurance coverage. If you see something that sets off alarm bells, then it’s time to start thinking about how much life insurance you need and researching the best term insurance policies.
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Why is Life Insurance Important?
Life insurance is important for individuals with dependents to provide income replacement and to cover funeral expenses. But it can also be important even for individuals without dependents in certain situations.
Let's take a look at the top ten reasons why buying a life insurance policy today might be the smartest thing for you to do.
1. Burial Costs Add Up
The average cost of final expenses is currently between $8,000 and $15,000, depending on whether you’re cremated or buried and whether you have a memorial service or a full funeral. Even a cremation with no service at all costs around $2,000.
If you don’t have a life insurance policy in place, your loved ones will need to tap into savings to cover these costs. When emotions are running high, people don't always think clearly. In some cases, grieving families end up putting themselves in serious debt by planning a service they can’t afford.10
A life insurance payout will help them plan an appropriate service without having to worry about finances during this difficult time.
2. Co-Signers Need Protection
If someone has co-signed on a loan for you and you die without proper insurance coverage, they will be held responsible for the entire loan balance.
Consider, for example, the case of Mary, a single mom with a young child and no life insurance. Mary's parents co-signed on an $80,000 student loan before she was tragically killed in a car accident. After her passing, they were shocked to learn that they were required to continue making Mary's loan payments. In addition, they were now caring for Mary's orphaned child. It's easy to see how this could quickly leave them in a financial crisis.
Some loans also have a provision that makes them immediately callable upon the loan holder's death. If this were the case, Mary's parents would need to come up with the entire balance of the loan right away. In this scenario, they could face having to tap into their retirement or even sell their home to cover her debt.
A term life insurance policy naming Mary's parents as the beneficiary would have avoided this problem. Adding an additional amount to cover the expenses of taking care of her child would ensure that everyone remains in a comfortable financial position while they grieve her passing. If Mary's financial situation didn't allow for the expense of insurance premiums, her parents would have benefitted from purchasing their own policy on Mary's life.
3. Life Insurance Protects Your Business
Many businesses are dependent on one or more key employees whose knowledge and experience simply aren’t replaceable. If one of these employees were to pass away, it could cause a significant financial loss and could even cripple the company. Sales could take a dive, and if the company is publicly traded, stock prices could plummet.
A key-person insurance policy will pay the business enough money to shore the business back up and buy it time to regain the trust of its customers and investors.
Business partners can also purchase life insurance policies on each other.
If one partner dies, the other partner can use the proceeds of the policy to purchase the other half of the business from the deceased partner’s family. This helps ensure that the family will receive a fair value for the business while also ensuring that the business can continue operating without taking the major financial hit of having to buy out half of the company. These policies are usually accompanied by a legal document known as a buy-sell agreement.
4. Employer-Sponsored Insurance Isn’t Enough
Many employee benefit packages include life insurance coverage that’s a multiple of your salary.
Even if the coverage you have is more than enough to cover your family’s needs, it’s never a good idea to rely completely on this coverage. If something happens and you decide to quit, get fired, or get laid off, your insurance coverage will likely cease. This will leave you and your family with a huge gap in your financial plan.
If this happens ten years down the road, your life insurance premium will be much higher than it would be if you just bought your own policy now. Even worse, if you develop a serious medical condition, then you may not be able to get coverage at all. This could leave your family in a serious financial predicament. It’s much better to purchase a private policy for the amount you need, then consider the coverage you get through work as an added bonus.
5. Single Parents Need to Look Out for Their Kids
When you’re a single parent, money is often tight. You probably have been meaning to get life insurance coverage, but something always seems to get in the way. It's normal to want to just hope for the best, but things happen. Consider the case of James, a single father of two boys who is living paycheck to paycheck. He currently has about $3,000 in savings and doesn't have life insurance.
If James were to die today, after paying for his burial expenses, his children would be penniless. They would have to depend on their new guardians to provide for all of their financial needs, or, even worse, could end up in the foster care system.
Since you never know what could happen, the time to purchase an inexpensive term insurance policy is right now. If you're not sure how you can afford it, try reviewing your budget to see where you can cut costs.
6. Stay-at-Home Parents Need Coverage, Too
Do stay-at-home moms and dads need life insurance? You bet.
Although most people buy coverage to replace their salaries, it’s important to take into account the value of the services that stay-at-home parents provide. From childcare and cleaning to tasks like grocery shopping, managing the family’s financing, and making repairs around the house, it’s important not to underestimate these contributions.
In fact, according to 2018 study by Salary.com, if a stay-at-home parent were to get paid for all the services they provide, they would earn an annual salary of approximately $162,581!
Buying a life insurance policy for a stay-at-home parent will allow the family to hire the additional help they need or give the surviving spouse the opportunity to stay home with the children for a few years until he or she can figure out what to do next.
7. Life Insurance Gives Families Peace of Mind
Planning ahead and purchasing the right amount of life insurance coverage can give you the power to secure your family’s financial future. A death benefit can help you meet goals like:
- Paying off the family’s mortgage and other debts
- Ensuring there's enough money for your children to go to college
- Helping your children to have their dream wedding and/or purchase their first home
- Providing for the surviving spouse until retirement or throughout their lifetime
Purchasing a bit more coverage than you think you need will also give your family some wiggle-room. This will allow them to adjust to living without you and make any necessary lifestyle changes without having to worry about how they'll pay the bills.
8. Childless Couples Can Benefit from Coverage
Married couples without children—and even couples who aren't married but live together—should consider buying life insurance, too.
Working couples without children can also benefit from purchasing a life insurance policy. While it might not be absolutely necessary, the death benefit can help the surviving party maintain their standard of living. This is particularly important if you own a home together.
When a partner is grieving, he or she might not be able to return to work right away. The last thing you want is for financial concerns to loom overhead while your partner tries to decide how to move forward without you. As long as paying an insurance premium won’t create a financial burden, purchasing policies and naming each other as beneficiaries can give you both some extra peace of mind.
9. Buying Life Insurance Early Can Save You Money
If you’ve read all of the points above and you’re still not sure you need a policy, consider this: Your life insurance coverage will never be less expensive than it is right now.
With every year that goes by, the cost of insurance coverage will increase simply due to the fact that you're a year older. Other issues can also impact your premiums including:
- Medical problems
- Treatment for drug or alcohol abuse or depression
- DUI or other driving citations
- Significant weight gain
Are you 100 percent sure none of these things could happen to you? Depending on the condition, the insurance company might even deny you coverage. If you have a family or business partner that needs protection in the future, the inability to get a life insurance policy could leave a gaping hole in your financial plan.
If you can afford a small life insurance premium then you might consider purchasing a policy while you’re young and healthy. If you don’t have anyone to leave the death benefit to, consider naming a charitable organization or another institution. You can always change your beneficiary designation when your circumstances change.
10. You Can Use Life Insurance to Leave a Legacy
Life insurance is a great way to leave a significant donation to a charitable organization or other institution upon your death. Purchasing a policy allows you to multiply your donation well beyond what you could afford with your current assets.
A life insurance policy is also an effective strategy for leaving an inheritance to loved ones. While you might not have a large number of assets, by paying an annual premium, you can leave a significant amount of tax-free money upon your death. This is an excellent way to set your children up for financial success and/or provide a financial cushion for future expenses that may arise.
Do I Need Life Insurance?
If you have children, are married, share a home with a domestic partner, have a business partner, or have any loans with cosigners, then yes, you should have life insurance!
If you don't yet meet any of the above criteria but expect to in the future, you should still consider buying life insurance soon, because it will only get more expensive as you get older.
Finally, remember that life insurance works best when purchased as part of a carefully thought-out financial plan rather than sold as a way to generate a commission for an insurance agent.
Make sure you buy life insurance on your own terms, not someone else's!
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