Not everyone needs life insurance. People who’ve accumulated enough wealth to cover their final expenses and who don't have dependents can usually forgo paying forlife insurance. On the other hand, there are several groups of people whom experts say should strongly consider life insurance, such as couples, parents of young children, and mortgage holders. Read on to discover who needs life insurance and who can probably skip it.
Key Takeaways
- Couples should each have life insurance in case one passes away so the other can maintain the same quality of life.
- People with young children are strongly recommended to have life insurance to protect their family.
- Homeowners should take out life insurance so that the death benefit can pay off the mortgage.
- Business owners and those who want to pass down a financial legacy are also advised to purchase life insurance.
- If an individual has accumulated enough wealth to take care of their family upon their passing, then life insurance may not be needed.
What Is Life Insurance?
Weighing Your Options
Life insurance is tricky. There are scenarios in which insurance can be vital to your family, but there may also be instances when the premiums are not worth it. If you currently have term life insurance, for example, there may come a time when it no longer makes sense to renew your policy after it expires.
Cash value policies, on the other hand, provide coverage that doesn't expire as long as you keep up the premiums. The main types of permanent policies available are whole life, universal life, and variable life. Cash value life insurance still means weighing your options as you can cancel to access funds within the policy to address current needs rather than saving the money for a future death benefit.
If you're wondering what to do, people in the following categories may want to consider adding/keeping life insurance in their financial plans.
Couples
Whether you’re recently married, living as domestic partners, or celebrating your 20th anniversary, you and your significant other have likely planned a life based on maintaining a certain income level. Unless each of you is able to maintain that income level on your own, it’s important to have life insurance to prevent a drastic change of lifestyle if one of you dies.
This is true even when you're both employed and could survive on one paycheck. Some spouses or partners may want or need to take an extended break from work following the death of their loved one. Life insurance affords that chance to grieve and readjust to new life circ*mstances, said Jason Tate, ChFC, CLU, CASL, owner of Jason Tate Financial Consulting in Murfreesboro, Tenn.
Mortgage Holders
A home mortgage is one of the largest assets and liabilities on your personal balance sheet. If a homeowner dies before the mortgage is paid off, beneficiaries and the lender can be protected by the proceeds of a life insurance policy, said Tate. “The lender wants to know that the mortgage payment can be covered. The beneficiaries need the ability to keep the house payment paid and prevent the second tragedy of being forced out of their home while grieving.”
While you can buy mortgage protection insurance when you finance your home, this type of insurance only covers the loan and leaves no other proceeds for your family. By buying your own life insurance, you can leave extra money behind for your loved ones,
New Parents and Parents of Minors
A new baby is a source of pride and excitement. It’s also a tiny person who, for the next 18 years or more, will be financially dependent on you.
“At the core of that is the responsibility for both parents to provide for a surviving spouse and child or children,” said Tate. “Life insurance provides tax-free money to surviving spouses or guardians and children for income replacement or debt payoff, which allows the family to maintain their current lifestyle.”
Life insurance planning should alsolook beyond a child’s first 18 years, Tate emphasized. Parents who want to provide for their children’s college education in the event of their passing should consider that expense when determining how much life insurance to purchase. Term life can provide funds in case you die before your children finish college. Permanent life insurance also allows you to save for college tax-free using cash value. You can then use the cash value to cover college expenses, reducing the need for student loans.
Minor Children
The loss of a child could be very devastating for a family and leave parents wanting or needing to take time off of work.On top of the emotional toll, there are funeral and burial costs.“It’s uncomfortable for parents to imagine, but families should be protected with life insurance in the event of the tragic premature passing of a child,” said Tate.
Many times a minor child can be added to an adult's policy via a child rider at a low cost. “That rider can typically remain in effect until the child reaches age 18,” said Tate.
Other policy alternatives include purchasing a whole life policy that a child can have for the rest of their life. “That provides insurability guarantees regardless of health,” adds Tate.
Parties to a Divorce
A trip down the aisle rarely includes plans to uncouple. But should it happen, don’t be surprised if the judge or mediator suggests both spouses purchase life insurance on themselves for the benefit of the other spouse if minor children or financial responsibilities exist post-divorce.
“The policy coverage might only extend for a certain period, making term insurance an appropriate fit for the situation,” noted Tate.
The majority of individuals who are single, financially independent, have no dependents, and do not own a business, do not need life insurance.
Business Owners and Partners
A new business comes with inventory, investment, and, many times, debt. “In order to provide solvency, business owners must protect their personal and business interests with life insurance in the case of a premature passing of an owner,” said Tate. Insurance on the owner could also help the surviving spouse weather the transition until the business can be taken over or sold.
If you have a business partner, that person is the equivalent of your professional spouse. Just like domestic partners, business partners need to be protected with life insurance in the event of the other’s demise, Tate explained. Insurance should cover each partner and help establish how a transition will occur if one of them dies or becomes disabled.
“When a business partner passes away, money helps purchase the remaining stock or business interest from the deceased's estate or family," said Tate. "This assures business continuity for business customers, and creates an estate that immediately establishes value on the asset for the deceased's estate."
Those Wanting to Leave a Financial Legacy
Generous people who want to pass on money for legacy purposes should consider purchasing life insurance. Whether its grandparents who want to pay for their grandchildren’s education or an individual who wants to leave a sizable donation to a local hospital, life insurance can provide money to beneficiaries, usually tax-free, according to Tate.
Which Type of Life Insurance Is the Most Affordable?
Term life insurance is the least expensive option for obtaining a death benefit. However, the policy will expire when its term runs out. It also does not accumulate any additional cash value.
Who Would Not Likely Need Life Insurance?
Single individuals without dependents, and who are themselves financially independent, may not benefit much from life insurance. Still, such individuals may still wish to purchase coverage in order to leave a greater financial legacy upon their death.
At What Age Should You Buy Life Insurance?
In general, life insurance is cheaper when you are younger and healthier. Therefore, you should buy it as young as possible if you think that you will need it presently, or in the foreseeable future. For instance, a young couple may buy life insurance right when they become engaged or when they have a child.
What Happens If You Have No Life Insurance?
Those without life insurance may pass away with financial obligations such as debts and unpaid bills that become the responsibility of their heirs. Their heirs would also need to pay for your final expenses out-of-pocket. Finally, if your family was depending on your income, they could struggle to get by if you pass away without life insurance.
What Age Should You Stop Life Insurance?
You can stop term life insurance once the needs you were covering have ended. For example, you stop once your children have all finished college and can support themselves financially. Permanent life insurance lasts your entire life, provided you keep paying the premiums. It's up to you when to stop. You can keep the policy for the rest of your life to provide an inheritance, or you can cancel if you'd prefer to take the cash value out for yourself.
If you're focused on future-proofing your finances, there are more resources here to help protect your assets.
The Bottom Line
There are many good reasons to carry life insurance, although it's not a must for everyone. It's important to take stock of your financial and life situation to determine what is in the best interests of you and your family. By doing so, you can decide whether you need life insurance or not.
