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Life insurance can seem like a complicated concept and spark a lot of questions. Who needs life insurance? Why does it matter? Who should have life insurance, and is it ever OK to not have it at all?
The good news is that it doesn't have to feel quite so overwhelming. Life insurance is important. However, your needs and financial goals are often the drivers for how much life insurance you may want to have at any given time. Considering what those needs and goals are is an essential first step.
Here's an overview to help you understand more about who might want life insurance and how to think about it through different life stages.
What Is the Purpose of Life Insurance?
In general, life insurance is there to provide funds to a person or business entity that would be financially affected by the death of the insured person. In exchange for premium payments, the insurance company promises to pay a predetermined amount, known as a death benefit, to the beneficiaries of the policy.
What Are the Benefits of Life Insurance?
Initially, people primarily took out life insurance policies to cover funeral and burial expenses. However, over the years, more people have looked to life insurance as part of their estate and financial planning. For some, it's a way to help provide some financial stability or income replacement to their families after they are gone.
For many, it helps to know that when they die, their beneficiaries will receive a death benefit that can help cover funeral costs, pay off debts, or even fund their lifestyle for the long-term.
Who May Need Life Insurance?
Your life insurance needs are generally going to depend on your life stage and situation. Here are a few different scenarios to consider.
You're a Breadwinner
For breadwinners, the primary goal of life insurance is typically to help provide an income replacement to your beneficiaries after you're gone. If, for example, your income is significantly larger than your spouse's, it may be difficult for them to maintain the same lifestyle if you were to die. Your life insurance death benefit can help provide a financial cushion over the long-term, and it can also be used to provide an inheritance.
You're a Stay-at-Home Parent
Many stay-at-home parents feel that, because they aren't bringing in an income, they don't need to have a life insurance policy. Although there's not always a direct monetary value to the work a stay-at-home parent provides, it's important to consider the cost of services if that parent is suddenly not there anymore. For example, if you have young children, you'd have to pay for additional cleaning, transportation and daycare. Your surviving spouse might also have to change jobs to be home more often. All of that has a real value, which life insurance can help cover.
You're a Divorced Parent
In the case of divorce, life insurance could be stipulated by the court. However, even if your former spouse has a life insurance policy that lists your shared children as the beneficiaries, it might not be enough for their needs. Remember, a death benefit can help to cover not only lifestyle needs but also debts, childcare costs and even college education. So, it can help provide an extra financial buffer for your children if they need it when the time comes.
You're a Parent of a Child Who Has Special Needs
If your child has special needs, there's an added layer of care to consider. If your child requires additional care now or may in the future, a life insurance policy can help cover the costs of those needs, including other caregivers and living arrangements.
You've Co-Signed a Loan
If you're a parent and you've co-signed a loan, it may be a good idea to purchase a life insurance policy on your child. For example, if you co-sign a loan to help your child pay for college or purchase a car, and then they unexpectedly die and the loan has not been paid off, you may be responsible for this debt. Life insurance can help relieve that financial burden in the event of your child's passing.
You're a Single Adult
If you have no children, this doesn't mean life insurance can't help provide some benefits for those you'll leave behind. While single adults may not need policies as large as breadwinners, it's important to think about any debts you might have. Your policy could help to cover those and remove the burden from your beneficiaries. If you don't have any debt at all, your benefit could ensure that funeral and burial expenses are covered.
You're a Homeowner With a Mortgage
Your home is likely one of your most significant assets. However, if you did pass unexpectedly, would your spouse, significant other or beneficiaries be able to cover your mortgage costs? If not, a life insurance policy could help those whom your home would be left to help cover the mortgage and upkeep.
You're in Your Retirement Years
In your later years, your life insurance needs will likely depend on your situation. For example, if you have little debt and significant retirement savings, your need for life insurance may be less. On the other hand, your life insurance death benefit can help to pay down debts and provide a boost in income to a surviving spouse who might not be able to make ends meet on their own.
You're a Business Owner
Life insurance for business owners, especially small business owners and those who run family businesses, can help to protect your business and family. Having a policy can not only help your beneficiaries — it can also prevent your business from going under, too. Buying key person insurance is one way to help keep your business afloat after you or another integral team member dies. Also, if you're a co-owner and you have a buy-sell agreement in place, you and your co-owner could purchase life insurance on each other and use the death benefit to buy the decedent's share.
Considerations at Different Life Stages
When considering who should have life insurance, it's also important to consider your life stage. New, young parents have different needs compared with retirees. Here's what you may want to think about at each stage of life.
Life Insurance in Your 20s & 30s
For many, this is a critical stage of life. You might be a newlywed who just bought a house, a married couple with a baby on the way or a professional moving into the next stage of your career with a higher income.
So, what matters here is thinking about not only your financial position but who you might leave behind. If you have a stay-at-home spouse and young children, their financial needs will be significant, and you might need a policy that will provide a benefit lasting 20 or 30 years.
Another benefit of purchasing life insurance in your 20s or 30s is insurability. Younger people generally enjoy lower premiums, and typically have fewer health issues that may affect their premium amount or insurability.
Life Insurance in Your 40s & 50s
As you approach middle age, life insurance needs can change. If your primary goal was having a policy that ensured your kids would make it through college, you may be able to start shifting some of your goals.
For example, that might mean moving toward a more affordable short-term life insurance policy that will help cover the needs of your spouse until you reach retirement. Or, if you still have debts, such as a mortgage or other loans, staying the course can help to ensure that your beneficiaries won't be saddled with your debts if you do pass unexpectedly.
Life Insurance in Your 60s & Beyond
For those moving into later years, life insurance needs can often diminish. Oftentimes, your need for life insurance is tied to your financial situation and your retirement savings.
For instance, if you are still supporting your adult children or you're a caregiver to another family member, life insurance can still help their financial stability. Alternately, if your children are grown or you don't have any dependents and you have a nice nest egg with few debts, your need may be less.
As you move into retirement, take time to assess your needs and determine if having life insurance still makes sense.
Who Needs Life Insurance FAQs
When it comes to life insurance, you may have questions. Here are some answers to a few common questions to help ease some confusion.
Why Is Life Insurance Important?
Life insurance is important because it helps reduce potential financial burdens for your beneficiaries, should your income cease to be part of their financial picture.
How Much Life Insurance Do You Need?
It really depends on your situation. If you are the primary earner in your home, then you'll likely want to consider your yearly salary and the amount of the years you may need covered. However, if you are single with no debt, you might need a smaller policy that helps cover the costs of funeral and burial expenses. Consider using a life insurance calculator to help you decide how much coverage you may need. You can also talk to a financial representative about your needs and wishes.
How Long Do You Need Life Insurance?
The length of time you need coverage for depends on your situation. You may buy whole life insurance, which covers you until you die as long as premiums are paid. You can also look at term life insurance policies, which may last for 5, 10, 20 or even 30 years. Someone in their late 20s with young children might want a 30-year policy, while someone eyeing retirement may only need a 10-year term. In essence, most people typically look to life insurance to help cover the major financial needs of their beneficiaries.
Do You Need Life Insurance If You Have No Dependents?
Even if you have no dependents, debt you have can be passed on to others, such as your parents, a sibling or your spouse. Having a death benefit can help ensure that they are not left paying your debt after you're gone. Plus, your policy can help to cover funeral and burial expenses, too.
Another option is to make a charity or organization the beneficiary of your life insurance policy. This may be a good way to leave money behind to a cause that's near and dear to your heart.
Who Needs Life Insurance the Most?
Those who are the breadwinners, have young families, or provide for their spouses may have a greater need for life insurance. This is often because the people they might leave behind would likely encounter a significant financial loss without them around. Life insurance can help to close the gap and provide financial stability.
Who Needs Life Insurance the Least?
Generally, those who are older, have little debt, and have no dependents may have less of a need for life insurance. While there are still instances where having a small life insurance policy can help potential beneficiaries, you might not need it as much as those who are younger with families.
Getting a life insurance policy is an important decision — one that can change depending on your needs and life stage. So, it's important to think through your financial situation, needs, and plans for the future, and then make a determination on what's right for you. For more information, consider speaking with a financial representative.