You’ve probably heard something like this: “Insurance is one of those things you hope you never need to use. But, when you do, you’ll be glad you have it.”
Life insurance offers financial protection for your family and dependents should something happen to you. There are so many situations where retaining life insurance makes sense: you have a decent amount of debt, you are in the wealth accumulation stage, you have young kids who you need to support financially, you own a business, etc.
But is there ever a point when you don't need it?
September is national life insurance awareness month, so we want to highlight this critical tool—when you need it and when you don't.
- Life insurance can help provide for your loved ones.
- There are two types of life insurance, term and permanent.
- You benefit from life insurance if you have dependents, have outstanding debt, or will need funds to cover funeral costs.
- You might no longer need life insurance if you have self-sufficient adult children and accumulated enough assets to cover debts, taxes, funeral expenses, etc.
What Is Life Insurance?
Life insurance works the same way as most other types of insurance. But, instead of covering the cost of damages or lost materials, it provides your loved ones with financial support if you pass away.
Think of life insurance as a contract between you and an insurance company. As long as you make regular payments (insurance premiums), the insurance company will “payout” a sum of money after you pass away.
This money goes directly to your selected beneficiaries like your spouse, children, or other close family members.
Life insurance is a “cushion” to help those you leave behind who depend on your income. Beneficiaries can use the benefit for your funeral expenses, repaying debt, replacing your income, and more.
Generally, life insurance comes in two packages: term and permanent. Let’s dive into each.
Term Life Insurance
As the name implies, term life insurance covers you for a limited period (typically 10-30 years). You can choose the term that best matches your needs, and if you pass away within that window, your beneficiaries will receive the payout.
Term life insurance policies are typically the most affordable, but your premium will depend on gender, age, current health, underlying medical conditions, behaviors (smoking), occupation, and more. You can shop around for policies that best fit your budget and coverage needs.
If you’re looking to save money on premiums and extend your coverage period, the “ladder strategy” may be beneficial. It entails purchasing multiple life insurance policies that expire at different times.
As time passes, your children grow up, you pay off your debts, etc., your life insurance needs change. By laddering policies, you are only paying for the protection you need in that particular season of life.
Permanent Life Insurance
Permanent life insurance covers your entire life, not just a set number of years.
A unique element associated with permanent life insurance policies is a “cash value.” Part of your premiums funnel into an investment account that you can access or leave to your beneficiaries as part of an inheritance.
As you can imagine, the premiums are typically more expensive.
But permanent life insurance policies can be complicated. With convoluted terms and benefits, you must clearly understand the policy specs before signing on the dotted line. For example, say you buy a permanent policy and accidentally miss a few payments decades later. At that point, the insurance company may cancel the policy. You’d lose out on the benefits you’ve accrued, and purchasing a new policy would likely be far more expensive.
The longevity of permanent life insurance can also be a disadvantage. Let’s say you purchase a policy early in life and later determine you don’t need that extensive coverage. At this point, if you were to cancel your plan, you would essentially lose all of the money you’ve already paid into the policy because permanent life insurance plans are typically not adjustable.
Generally, many people benefit from term policies rather than permanent life insurance, though what’s best for you depends on your unique situation.
What Life Insurance Can Do For You And Your Family
We know first-hand the effect life insurance can have on your loved ones. In addition to financial benefits, it can relieve some stress during a difficult and emotional time.
For example, say you are a single parent to a teenage child. Life insurance provides an avenue to leave money for education, relocating to a new home, healthcare, etc., if you pass away.
Money doesn’t bring people back, but it can relieve some financial burdens. As we mentioned earlier, beneficiaries can use life insurance funds in several ways, including:
- Replace lost income
- Cover medical bills
- Pay your funeral expenses
- Pay off any debt
- Serve as an emergency fund
- Help provide for your dependents’ future needs (for example, education expenses)
Having life insurance can give you and your loved one's peace of mind. Losing a loved one comes with many unknowns, especially when dealing with emotions and finances. A life insurance plan not only covers those financial needs but also emotional needs like counseling, relocating to a new home, or anything else your loved ones may need during the grieving process.
Your life insurance policy may also be a way to leave a legacy. You can name a charity as a co-beneficiary on your policy, funneling some of the money to a cause in your honor. If you have a passion for education, arts programs, sports, or anything else, your life insurance dollars can help you leave that legacy.
When Don’t I Need Life Insurance?
Life insurance is a bit different than other forms of insurance. For example, if you own and drive a car, you have to have car insurance. If you own a home, you need homeowners insurance.
But you aren’t required to have life insurance! In most cases, it’s probably best that you elect life insurance coverage. But, there are situations where you might not need it.
To help determine your life insurance needs, ask yourself the following questions:
- Do you have dependents, and are they financially independent?
- Do you own a business? If so, what’s the plan for how the company would operate without you?
- How much debt do you have? Could your family continue to make those full payments easily without your income?
- Are there enough funds to cover funeral and other end-of-life expenses?
Life insurance might be the right move for you if you have people who rely on your income. A life insurance policy can help replace your financial contributions, so your family can continue their lifestyle.
For example, if you leave behind a spouse and kids, there may be additional expenses like childcare, your spouse going back to work, moving to a more affordable space, college funds, retirement, etc., that they’ll need support for.
If you own a business, life insurance can give your beneficiaries cash to sell or continue the business.
Your estate pays your debts when you die, and any loans you co-signed (like your mortgage or car payment) will become the co-signer's responsibility. If you have significant debt, life insurance can help pay it off. That way, your co-signers, and heirs won’t have to worry about paying those outstanding bills.
Funeral expenses are one of the most common uses for life insurance funds. In 2022, the average funeral cost is between $7,000 and $12,000. If you don’t have sufficient assets to cover that expense, life insurance can help.
If any of those questions don’t apply, you might not need life insurance! If you or you and your spouse have accumulated sufficient assets to independently care for yourselves, your children are financially independent, you aren’t caring for an aging parent, and all your debts are covered, you may not need to spend the money on monthly premiums. Instead, you could redirect that money to other areas of your financial plan.
Finding The Life Insurance Plan That Works For You
A key component of obtaining life insurance is timing—you don’t want to wait until it’s too late.
No one likes to think about death, but planning ahead is one of the best things you can do for your loved ones. At AVID Planning, we’ve discovered that insurance is one of the most underfunded items for our clients when we begin the financial planning process.
Work with your financial advisor to analyze your comprehensive financial situation and whether life insurance is right for you. We know how important life insurance can be and want to ensure you get the most out of your policy to maximize its benefits for you and your family.
Please set up a time to meet with us today, or stop by our office in St. Petersburg, FL. We can’t wait to work with you.