Do I Need Life Insurance?


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UPDATED: 2021-03-30T20:00:28.427Z
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A photo of a life insurance application.

Do I need life insurance? Most people don't take much time to think about what will happen when they're no longer living. Our loved ones, however, will be responsible for us when we pass on. Planning ahead can make things easier on them when it's time to handle the arrangements.

One of the ways we can prepare our friends and families is by considering life insurance. Life insurance helps pay for funeral services, outstanding debts, and loss of income when you pass away.

Not everyone will need life insurance, and not everyone needs the same type of life insurance. Like automobile and medical insurance, life insurance can be intimidating to navigate. This article will cover the basics of life insurance to give you a head start.

Is Life Insurance Right for Me?

To be clear, life insurance benefits generally only cover taxes, debts, and income replacement. It's not a money-making opportunity, and most beneficiaries are unable to survive on life insurance benefits alone.

If someone will suffer financially or be at risk after you die, you'll want to have a life insurance policy in place. Life insurance will help survivors handle any taxes owed and settle amounts owed to creditors.

If you have a house, even when you own the property outright, the person you pass it onto will sometimes have to pay an estate tax when they inherit. The state you live in levies estate taxes on inherited property. It's one of the taxes life insurance can help cover.

Very few people live debt-free. The average American has over $90,000 in debt. It stands to reason that, when you pass away, you'll have debt of your own that someone needs to settle. Debt is another place life insurance comes in handy.

Without life insurance, your beneficiaries will have to repay your debts. So, if you die with $30,000 in debt, your spouse or children will take on that $30,000 responsibility. That can be a heavy burden, especially when added to their own debt.

Suppose you support a family with some or all of your income, and something happens to you before you retire. In that case, life insurance can replace your income. Anyone else contributing to the household's income will likely still need to do so. A life insurance policy can provide your part of the support.

Life insurance isn't suitable for everyone. If you are single, financially independent, have substantial liquid assets, or don't have much debt, life insurance might not be the right fit.

Families with young children need to have enough life insurance as parents coverage to cover all of the children's expenses until they're independent. Having a policy is especially imperative for single-parent households.

Another good reason for life insurance is if you have a spouse who is close to retirement. If they rely on contributions from your income to fund their retirement plan, they'll need life insurance benefits. They may not be able to fund their retirement on their own entirely.

To make a long story short, the answer to "who needs life insurance" is anyone who has dependents, owns a business, or has business partners. It's a benefit for those we leave behind.

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When Do I Need Life Insurance?

Most of us expect to live well into our advanced years. However, there's no guarantee that we'll be elderly when we expire. Automobile accidents, heart disease, cancer, and stroke can happen at any age and are the leading causes of death in the U.S.

The earlier you begin to plan, the better. People typically start to need life insurance when they get married and start a family. However, if you have parents or siblings dependent on you, you might consider life insurance earlier.

Life insurance is less expensive the younger you are when you buy it. If you don't have a spouse or children yet, but plan to in the future, it could be cost-effective to invest in a plan when you're young.

It's a good idea to consider life insurance when you're healthy. A new policy may require a physical medical exam to be eligible for benefits. The fewer health conditions you have when you apply, the lower your payments will be.

Many companies choose to have life insurance plans in place to cover business owners and key employees. If you own a business either by yourself or with a partner, your death could negatively impact your business.

A life insurance policy with the business or business partner as beneficiary can help ensure your legacy continues after you. Unless your heirs are financially capable of replacing your income, someone may have to sell or shut down the company.

It's never too early to put an estate plan or will in place. In 2019, the median cost for funeral and burial expenses was $7,640, and the median price for funeral and cremation was $5,150. That doesn't include burial plots, interstate transportation, flowers, or church services.

You should make sure you have enough life insurance to cover any additional expenses. If you want a burial at sea, to have your ashes spread in a particular place, or want an elaborate ceremony, it will cost extra.

What Kind of Life Insurance Should I Get?

If you feel that life insurance is right for you, the next question you need to answer is: what kind of life insurance should I get? There are three main types of life insurance.

  • Whole Life: A whole life policy will last your entire lifetime as long as payments are current. When you die, the policy pays out to your designated beneficiaries. In addition to the main benefit, whole life also has a built-in savings plan.

You can accumulate cash in the account and invest, withdraw, or borrow against the balance during your lifetime.

  • Term Life: A term life policy has a death benefit but no savings component. It covers a specified amount of time and then expires. At the end of the term, you can renew the policy, convert it to another type of policy, or allow it to expire.

What you pay for the policy depends on your age, health, and life expectancy when you apply.

  • Universal Life: Universal life is like a combination of whole life and term life. Like whole life, it has a savings component. Any beneficiaries, however, won't receive this amount as part of the death benefit payout. The insurance company retains any cash value accumulated.

Premiums are similar to a term life policy. The insurance company can charge a single, lump-sum premium, scheduled fixed premium, or flexible premium payments.

To decide which one you need, ask yourself if you'll use the cash savings plan. If you don't see yourself putting this to use, you may want a term life policy. You'll also want to look at the cost of the policy. Whole life is typically the most expensive type of policy.

If you want a life insurance policy but don't have much to invest right now, a term life policy could be the option for you. You can decide to change your policy when your term expires.

What if My Employer Provides Life Insurance?

Life insurance is a common benefit for employers to provide. These policies are usually group term life policies. That's when one policy covers a group of people. Most people take advantage of a group plan when available. However, it may not be enough.

If your employer provides life insurance, it's a good idea to assess whether it's sufficient to cover your family's needs. Basic coverage is ordinarily equivalent to your base salary. You'll need to sign up during your plan's enrollment period.

Sometimes, an employer will restrict life insurance eligibility to permanent employees, tenured employees, or employees at a specific position. Rarely do group policies carry over if your job terminates or you move to another company.

There are limits to the amount of group life insurance you can receive as a benefit. If you receive over $50,000 in life insurance from your employer, you're required to pay a tax on that amount.

It's essential to take advantage of open enrollment periods to reassess your policy. Major life events like the birth of a child or a wedding can change the amount of insurance you need. Most of the time, group term life policies don't require you to undergo a physical exam to sign up.

Policy limits on employer-provided group term life insurance are usually low. Some employers offer the chance to upgrade your policy. If not, you should consider shopping around for supplemental life insurance.

Life insurance companies offer free quotes on their policies. It's worth taking a look around to see if an individual policy is a better deal than the one provided through your employer.

Since group policies usually cover the most general life insurance needs, yours may not be sufficient for your individual circumstances. Spending some time researching could translate to significant savings in the end.

When shopping for life insurance, make sure you consider the companies that are rated the best life insurance companies in your area.

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