Do You Need Insurance?
If you are wondering whether or not you should buy life insurance, ask yourself this one question: “Would my death leave anyone in a financial bind?” If you answer “yes”, it may be time to get serious about shopping for life insurance. Life insurance can offer peace of mind, ensuring that your debts or loved ones will be taken care of in the event of your death.
The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case of your death. Life insurance can also serve other estate planning purposes, such as giving money to charity on your death, paying for estate taxes, or providing for a buy-out of a business interest.
Whether you need to buy a life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance. Here are some typical families and a summary of their need for life insurance:
(1) Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
(2) Married Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in situation 1. However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse.
(3) Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes.
(4) Children. Children generally need only enough life insurance to pay burial expenses and medical debts. Many advisors recommend self-insuring for children rather than buying an insurance policy.
(5) Retirees. There is less of a need for life insurance after retirement, unless it is to be used for estate planning purposes. You may need to provide an income for the second spouse to die if your retirement assets are not large enough. Further, you will need some insurance to pay burial expenses, final medical costs, and debts.
The rule of thumb is once you become a parent, you should have life-insurance coverage that will last until your youngest child completes college. If you have large financial obligations such as high credit-card debt or mortgage, you could use life insurance to ensure that debt is covered. Because life-insurance death benefits are tax-exempt, many financial planners often use clients’ life-insurance benefits to help pay for the estate taxes generated upon the death of a loved one.
