How to Know When You Need a Life Insurance Policy?
You’ve heard about life insurance, of course, but why purchase a life insurance policy? This article explores the five most common reasons to get life insurance.
1. You are the primary breadwinner and have dependents.
This is by far the most common reason people purchase life insurance. Often one parent is the primary breadwinner for the household and takes out a policy in an amount that will replace, wholly or in part, the income lost should that parent die.
How much life insurance do I need? There are several factors you should consider, namely:
- The age of your children;
- The amount of income that must be replaced;
- Any special needs of your dependents;
- Any other anticipated expenses that must be paid, such as child care, college expenses, medical care, etc.
Multiple policies in different amounts and terms can be purchased to provide for the changing needs of your family over time. There are online calculators to help you get an idea of how much insurance you need, and an agent can help you as well. Shop rates for free here.
2. You want to provide for end-of-life expenses.
This is also common among people of all economic backgrounds. A policy providing for funeral expenses is very inexpensive and provides a decedent’s loved ones with the immediate means to pay for that.
Do I need life insurance if I have no dependents? Yes - it is an inexpensive way to get your funeral expenses readily and easily paid.
3. You are ordered by the Court to maintain life insurance as part of a support order.
If you are a support obligor - meaning, you have been ordered to pay child support, alimony, or spousal support - you may also be ordered to maintain life insurance in an amount that will provide for your dependents should you die and your income is lost to them.
4. You want to pass assets to your beneficiaries and keep them out of the reach of creditors.
This is a strategy used by estate planners to leave money to heirs outside the estate. When you die, your will is probated, your estate is administered, and before your heirs receive anything your bills are paid. To ensure your heirs receive something despite any outstanding bills, you can take out life insurance and name them as beneficiaries. The death benefit is payable almost immediately, barring any applicable exclusions or other problems, and that amount passes outside the estate and therefore out of the reach of your creditors.
5. You’ve been advised that life insurance is an important part of your estate plan.
If you have a comprehensive estate plan, taking advantage of wills and trusts as fits your financial and family situation, you may also be advised to also take out a term life insurance policy or a whole life insurance policy.
Term Life Insurance vs. Whole Life Insurance
These are the two primary types of life insurance. What’s the difference? As you might expect, term life insurance is for a specified time period of coverage, such as 10, 20, or 30 years, after which time it expires. You pay insurance premiums over the course of the term, and if you live past the end of the term your beneficiaries receive nothing. For this reason, it is much less expensive than whole life insurance.
In contrast, whole life insurance policies accrue value over time - value that you can withdraw or borrow against, or that you can use to purchase additional coverage. If you’ve optimized your estate plan your advisor might suggest that you consider whole life, as again, life insurance death benefits pass to your beneficiaries/heirs outside the estate and will not be subject to taxes or the claims of creditors.
Do any of these reasons to purchase life insurance apply to you? Talk with an agent or your estate attorney, who can advise you as to what type and amount of life insurance will meet your needs and the needs of your family.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She often works for Chad Boonswang, Esq., a busy life insurance attorney in Philadelphia.
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