When Do You Need Life Insurance?

Life insurance is a very important and often overlooked aspect of one’s financial plan. While it is somewhat uncomfortable to think about, your loved ones may need support after you die, even if they do not currently depend on your income. Whether it is helping pay for your funeral or giving those you love some financial security while they grieve, a life insurance policy may help them maintain their current quality of life after you pass.

Do you need life insurance even if you do not believe you will die anytime soon? What if you do not have children or dependents?  While there is no single correct answer to this question, it is always best to review your options then choose a policy that best fits your situation/needs.

Ask yourself: Would your death significantly impact anyone financially? If the answer is yes, consider life insurance. Described below are some potential situations in which life insurance becomes an important tool:

As a Homeowner – If you have an outstanding mortgage on your home, it may be a prudent idea to have life insurance coverage for at least the amount of mortgage balance. This way, in the event of your passing, your partner will be able to pay off the loan and continue living in the home with peace of mind. Types of insurance that could be appropriate here are term life insurance or decreasing term life insurance in which the balance of coverage reduces over time as the outstanding principal on the loan decreases.

As a Parent – You want your children to have the best of everything possible with your available resources while you are living. Having sufficient life insurance that would cover potential costs leading up to college graduation, i.e., launching them in life, is another consideration. When used in conjunction with any college savings that are already in place, it can avoid putting a burden on surviving family members. This is especially important if you are not employed outside the home, as your absence would increase costs related to caring for the home, children, etc. In this situation, term life insurance or whole life policies may be appropriate.

As a Business Owner – It is important that you maintain sufficient life insurance coverage as a business owner so that your family, business, business partners, and employees are protected by ensuring the business can continue operating. The coverage purchased can help your business partner with funds to buy out the business and give your family access to funds that they may need. Several types of insurance may be considered appropriate here, such as term or whole life insurance, key person life insurance, or buy-sell agreements supported with suitable life insurance coverage.

As a Student – If the student has taken out private loans to fund their college costs, it may be prudent to establish life insurance coverage for the outstanding amount of the debt. In some cases, the student’s passing initiates accelerated, or even immediate, repayment and having coverage can ease the immediate burden on the family members who may have co-signed the loan.

As an estate planning tool – If your estate is large enough where estate taxes could be a concern, it may be appropriate for you to buy a policy that would replace a portion of the funds used to pay these taxes. It can also allow you to leave or pass on a legacy to your favorite charity, etc.

If you buy a life insurance policy when you are younger and in better health, you will likely have lower premiums than if you had waited. For most policies your premiums are based on your initial health and age (and ending age for term policies) making it typically more cost-effective to get a policy at a younger age.

It is our belief that there is no perfect age to get life insurance, but you should consider waiting until you have a steady income to pay for the premiums. It is generally wise to focus on stabilizing your finances prior to preparing to help your loved ones after your passing. That being said, there are many policy options at different price points, some of which are highly affordable.

Another thing to note is that there is no rule against having more than one life insurance policy. You can always cancel and change your plan later in life, but no one’s good health is guaranteed. If you are in poor health your premiums will be higher, or you could be denied a new policy entirely.

Please reach out to your financial advisor to review any existing policies that you have or to identify any gaps in coverage that can be protected with life insurance.

Presented by Sumedha Malhotra, CFP® and Alexander Lilly

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