Do I Need Life Insurance?
Life insurance provides financial support in the event of your death for people who depend on your income such as your spouse or children. It can also help pay off personal or business, related debt including loans should you pass away. Life insurance can also be purchased for your children which can provide a savings account called cash value that can be tapped into and used for various expenses as your child gets older. You may not need life insurance if you don’t have dependents, are self-insured and are debt-free. For those who do purchase life insurance, you can choose between term life and permanent life depending on your needs. You will get a better price on life insurance if you purchase it while you are younger and have fewer health risks.
If you have anyone who will need financial support when you’re gone, keep reading and see what life insurance is and how it can help you and your family.
Who Needs Life Insurance?
Life insurance is for those who have people in their lives that rely on their income. We’ve compiled a breakdown of the various situations that may require you to get a life insurance policy:
- Being newly married - You may need a life insurance policy to help provide financial security to your new family in the event you die and your spouse is left without your income. Nearly 50% of couples both work. Removing half of that income can create a large burden, so consider a life insurance policy.
- Having young children - Having dependants is a worthwhile reason to get a life insurance policy since they literally rely on you for their survival. Young children obviously don’t have the means to provide for themselves, and if you die before they’ve become independent, their lives could become financially unbearable.
- Savings account for children - Your child can have a permanent life insurance policy which comes with cash value. Cash value refers to the investment or savings portion of your account that is built into the insurance policy and is designed to earn interest. This interest can be used by your children for college, purchasing a home or any other expenses.
- Having a business - A life insurance policy can help protect any business partners if there any outstanding loans after you die.
- Having a mortgage - A life insurance policy can help pay the remaining debt on a home loan so your family doesn’t have to worry about monthly payments.
- Other debts - Having a life insurance policy can help cover any additional debt that may be lingering if you pass away. This could be a student loan, construction loan or car loan. A small, term life insurance policy can help pay off your remaining debt so your family will not be left with an extra burden.
- Leaving a legacy - A life insurance policy payout can be used to open a scholarship fund or for a charitable organization.
Do I Need Life Insurance?
You need life insurance if there are people who rely on your income such as children or a spouse, or if you have loans for a small business. The payout can help provide financial support for your family or pay off business loans.
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What Kind of Life Insurance Do I Need?
Term life insurance: Term life insurance is a relatively cheap and simple form of life insurance coverage that lasts for a predetermined amount of time, like 10, 20 or 30 years. Premiums for term life insurance are cheaper than other life insurance products because the coverage only lasts for a specified amount of time. Premiums are paid throughout the term of the policy, and if the insured dies within the term, the life insurance company pays out a death benefit to the policyholder's beneficiaries. The policy can usually be renewed at the end of the term if life insurance is still needed. The cost of insurance will be higher at this point due to advanced age and any accompanying health issues, but ideally you won’t be needing nearly as much coverage at this point. To make things easier, we’ve broken down term life insurance so you can see what will work best for you:
- Level term - Level term means your premiums, payments and death benefit remain the same throughout the entire policy. Most term life insurance policies are level term.
- Renewable term - Renewable term refers to a clause that is found in many term life insurance policies that allows the insured to maintain coverage without any new underwriting.
- Convertible term - Convertible term refers to a term life insurance policy that can be changed into a permanent life insurance policy whenever you choose. Consider switching to a permanent life insurance policy if you anticipate needing coverage that lasts your entire life.
- Decreasing term - Decreasing term refers to a term life insurance policy wherein the coverage decreases over time. The premiums and the length of the term remain the same. This could be a good option if you think your need for life insurance will lessen over time.
Permanent life insurance: Permanent life insurance maintains continuous coverage as long as you pay your premiums. This type of life insurance is more expensive than a term life policy. However, the premium will remain the same instead of rising with each new term. Examples of permanent life insurance include:
- Universal life - Universal life offers more flexibility with your policy:
- You can withdraw money or borrow against the cash value*
- Cash value earns interest
- Flexibility with premiums
- The ability to adjust your death benefit
- Indexed universal - Indexed universal’s cash value is based on a stock market index like the Nasdaq composite instead of growing at a fixed rate.
- Variable universal - A variable universal life insurance policy uses investments to grow its cash value component similar to an indexed policy. However, there are wider choices of investment options than a single market index.
- Whole life - Whole life allows you to lock in your premium for as long as the policy is in place. It provides a death benefit and a cash value that grows at a fixed rate which you can access through loans or withdrawals. The cash value will begin to decrease as you continue to age.
How Do I Cash Out My Life Insurance Policy?
You can cash out your life insurance policy in three ways:
- Tap into the cash value - You can do this in a number of ways:
- Loans: You can take a loan from your cash value. It does not usually have a payback schedule, though it will accrue interest charges which affect your death benefit
- Withdrawals: You can withdraw funds from your cash value with no interest charges. Doing this may result in a change in premiums which may also change your benefits.
- Surrender: This essentially means canceling your policy which releases the funds of your cash value. You will most likely need to pay a cancellation fee depending on when you cancel. You may also need to pay income tax if your payout exceeds the premiums you paid over the life of the policy.
- Apply for living benefits - This allows you to pull out up to 50% of your life insurance for specific reasons, including:
- Chronic illness
- Long-term care
- Terminal illness
- Life settlements - The life insurance policy is sold to a third party for a lump-sum. The lump-sum is less than the death benefit.
How Much Life Insurance Do I Need?
How much life insurance you need depends on your situation. Below are some of the ways you can figure out how much life insurance to buy.
- Multiplying your income - The simplest way to figure out how much life insurance to buy is to take your yearly income and multiply it by the number of years you think your family would need your financial support. While the numbers vary, we suggest between six and 12 years.
- Income plus financial obligations - Another way to calculate how much life insurance you should buy is to multiply your income by the number of years you think your family would need your financial support and add any debt that should be paid off.
- The DIME formula - You can also use the DIME formula to calculate the amount of life insurance you need. It has four parts; debt, income, mortgage, and education:
- Debt plus final expenses - Add together any debt you have plus any final expenses.
- Income times years - Multiply your income by how many years into the future your family would need financial support.
- Mortgage balance - Look at what your remaining mortgage balance is.
- Education - You will need to add up the cost of college for each of your children.
Once you have these numbers, add them up and you’ll get the amount of life insurance that will be suitable for your family.
Other Factors That Affect How Much Life Insurance You Get
Below are a few additional factors you should consider when figuring out how much life insurance to purchase:
- Childcare - Your life insurance payout may need to be used for child care while your spouse seeks employment.
- Number of children - The number of children you have can severely affect your family's expenses.
- Age of kids - Young dependent children will need more life insurance protection than their older more independent counterparts.
- Long-term dependents - You should also consider whether or not you have elderly parents you are caring for or if you have a child with special needs.
- Spouse's earning potential - Your spouse’s ability to bring in an income may play a factor in how much life insurance you purchase.
Who Doesn’t Need Life Insurance?
Those who are self-insured* with no debt or dependents, including spouses, children or elderly parents, can go without life insurance. Life insurance is there to provide aid to people who rely on your income. If that is not the case for you, then life insurance won’t be necessary.
*Being self-insured refers to having enough money and investments that you’re able to pay for what an insurance company would typically cover without causing financial hardship to yourself or others.
When Is it Good To Have Life Insurance?
You should buy life insurance sooner rather than later because it will cost less while you are young. This is based on insurance mortality risk tables and the fact that you are much less likely to die until you are older. This makes you cheaper to insure while you are young. Depending on the age and health of the insured, life insurance rates can be as low as $15 to $17 a month.
Buying life insurance at a younger age also helps avoid the potential risk of being turned down because of a health-related issue later on. Having an existing health issue can also make buying a policy more expensive. If you get a life insurance plan now, you’re set for the length of your policy, regardless of what may happen to your health.
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