The short answer is that it depends on how you answer a few simple questions. Are there family members who will need to be cared for financially when you die? Will your survivors or beneficiaries inherit debt such as a mortgage or a personal or car loan? Do you already have a large policy through your employer? (Many people do without knowing it).
For single individuals with no dependents, there really isn’t any good reason to purchase life insurance. If we have a spouse or dependents, we need to consider and prepare for their financial situation in case we’re no longer around. Any debts we leave behind will need to be paid, and our survivors will have expenses before and after retirement age. We may have also planned additional expenses like a college fund for children. This is all part of survivorship planning.
Survivorship planning is an often overlooked area of personal finance or is limited to large obligations like a mortgage, and it doesn’t consider the many smaller items that add up to large amounts of money. When we evaluate our life insurance needs, we should start by analyzing the ability of our dependents to continue financially without us around beginning tomorrow, and then we should think about how we can minimize the financial impact of our sudden death. This analysis should include much more than the balance on our mortgage. Once the amount that our survivors will need is determined, we can consider savings and investments to see if life insurance should be purchased to cover the gap.
Notice that we’re evaluating the financial needs of our survivors beginning tomorrow and ending with their life expectancy. This means that each day that we don’t pass away, there is one less day of financial expenses to consider. As an example, if my analysis includes a $2,300.00 per month mortgage payment for a mortgage that will be paid off in five years, then if five years has passed and I’m still around, the mortgage is no longer a part of my survivorship concerns. I may have purchased a life insurance policy worth $500,000 when the home was purchased, at the present time the balance is $138,000 (five years at $2,300 per month), and in five years the mortgage will be paid off. The amount of life insurance that I need changes over time as expenses are paid.
Through an Employer
Many employers provide coverage or reduced-rate coverage as a benefit. Life insurance through an employer is often a multiple of salary, meaning we’re insured for one or even two times our annual salary. This is often free or very inexpensive. If we leave the employer we can often continue this coverage at a reduced rate, or in some cases it’s terminated. Some employers carry life insurance policies on their employees, but the company is the beneficiary. It’s best to investigate employer life insurance before depending on it.
On the Market
There are basically three types of life insurance: term, whole life, and universal life. They differ slightly from company to company, but essentially term life insurance is coverage that is purchased for a certain period of time, whole life has a cash value that accumulates over the years, and universal life includes an investment portion. Due to the complexities of insurance products, it’s important to understand the coverage, benefits, and shortcomings of each type. We should consider our individual circumstances, the coverage needed, and the cost of the insurance. Although life insurance comes in many flavors, I recommend thoroughly investigating any life insurance product that is not Term Insurance. Careful consideration will show that a term life insurance policy will provide the necessary protection.
The goal is to provide lifelong financial protection for our loved ones in case we’re not around. Once we have an idea of how much they would need, a term life insurance policy can provide this financial safety net just in case.
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