Needs for Life Insurance
What are your needs for life insurance?
Explanations provided by consumer organizations and state departments of insurance.
Why buy life insurance?
Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways.
Income replacement: For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a life insurance policy can help supplement retirement income. This can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.
Pay outstanding debts and long-term obligations: Consider life insurance so that your loved ones have the money to offset burial costs, credit card debts and medical expenses not covered by health insurance. In addition, life insurance can be used to pay off the mortgage, supplement retirement savings and help pay college tuition.
Estate planning: The proceeds of a life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets.
Charitable contributions: If you have a favorite charity, you can designate some of the proceeds from your life insurance to go to this organization.
Defining Your Needs
There are many reasons for purchasing life insurance, among which are the following:
Insurance to provide family protection and financial security to surviving family members upon the death of the insured person.
Insurance to cover a particular need such as paying off a mortgage or other debt upon the insured’s death.
Business insurance to compensate a company on the death of a key employee or to provide a surviving partner the resources to buy out the deceased partner’s share of the business.
Insurance to provide funds to pay estate taxes or other final obligations necessary to settle a deceased person’s estate.
Insurance to provide the funds necessary for the deceased person’s burial expenses.
Assessing Your Needs
Before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments, or college?
You should reevaluate your life insurance policies annually or whenever you experience a major life event such as marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.
Following are examples of factors you may want to consider at various stages of your life:
Single person with no dependents: Funeral expenses; medical bills; debts, such as credit cards or student loans; elderly parents who may be dependent upon you for support.
Note: Buying life insurance at a young age is cheaper. As you get older or possibly incur a serious health condition, it will be more expensive or difficult to buy a policy.
Single person with dependents: Funeral expenses; medical bills; outstanding debts; caretaker expenses for your surviving dependents; education costs for surviving children.
Couple with no children: Funeral expenses; medical bills; outstanding debts, especially mortgage or car payments.
Couple with children: Funeral expenses; medical bills; outstanding debts, especially mortgage payments; child-rearing expenses; education costs.
Note: Even if one partner does not work outside the home, you may want to consider life insurance to help pay for childcare or other services performed by that partner.
Older couple: Funeral expenses; medical bills; impact on spendable income; outstanding debts, such as a new home, second vacation home, or recreational vehicle; impact on assets you may want to leave for children or grandchildren.
Illinois Department of Financial and Professional Regulation: Division of Insurance
The Purpose Of Life Insurance
Your need for life insurance will vary with your age and responsibilities. The amount of insurance you buy should depend on the standard of living you wish to assure your dependents. You should consider the amount of assets and sources of income available to your dependents when you pass away. Social security benefits, available cash and other sources of income and investments may not provide the standard of living you have in mind. Life insurance helps bridge the gap between the financial needs of your dependents and the amount available from other sources, is the amount to be provided by life insurance. Your agent or other financial advisor can help you with these calculations. The Internet, as well as many financial magazines, books and articles are available to help you as well.
Life insurance is fundamentally different from all other kinds of insurance. The main difference is that other kinds of insurance protect you against things that might happen.
- You buy auto insurance because your car might be stolen or involved in an accident
- You buy health insurance because you might get sick
- Professionals buy malpractice insurance because they might be sued
If you're lucky, those things will never happen. And the premiums you paid will be used by the insurance company to cover claims for other people who are also insured. But, life insurance insures against death, the one thing guaranteed to happen.
- There's no might about it
- It's not something we like to think about, but sooner or later we all die
- The only thing we don't know is when
The other difference is that you usually insure your life to protect someone else.
- The beneficiaries are those you'll leave behind
- Life insurance makes it possible for you to make it easier for them to carry on once you're gone
The historical roots of life insurance go back at least to the ancient Romans, who had burial clubs to finance members' funeral expenses and provide support to the surviving families. Today, life insurance is much more sophisticated and complicated, but the basic notion is the same.