Do You Need Life Insurance?
Do You Need Life Insurance? If So, How Much Should You Have?
Do you need life insurance - the answer to this question very much depends on your own family and financial situation. For some people life insurance may be unnecessary, others may want $250,000, some want $5 million dollars or more, and some may just want enough for funeral expenses (of course there are a lot of areas in between).
Who may want or need life insurance?
The times in which someone often truly needs (or at least would like) to have a more substantial life insurance policy is when they have children / dependents and / or a shared debt obligation. Examples would be when someone has a baby, or if a couple purchase a home together and takes out a mortgage.
If someone has a debt obligation that another person is a co-signor on, like a mortgage or a student loan, then that person may want to have a life insurance policy to pay off that loan in the event they were to pass. Another time people want or need life insurance is if they want to pass on a financial legacy, or for there to be enough funds to cover funeral costs and final expenses.
People have also started using life insurance to also protect their families from the potentially high costs of long-term care. They can accomplish this by adding a long-term care rider to their policies. By doing this, they know their families will ultimately receive a benefit, whether it be from a death benefit or a long-term care benefit.
How much life insurance should you have?
If someone is looking to use life insurance for legacy planning, long-term care, or just for funeral expenses, the amount of insurance to purchase is often tied to a specific goal.
When someone has or is planning to start a family, it is a bit more complex to decide what the right amount of life insurance to have is. I often suggest that someone think about how much money they would want to be available to their family and for how long when deciding how much insurance to purchase. Considerations can be to have enough to cover mortgage or rent payments, taxes, insurance, children's education costs, retirement savings and general household expenses. So, for example, let's say someone wanted their family to have $100,000 available to them per year for the next twenty years while their children were growing up, they may want to have $2,000,000 of life insurance. Another way some people look at it, is to more simply have enough to pay off a mortgage, cover children's insurance cost, and to leave some additional funds to cover expenses. Everyone's personal financial circumstances are different, such as whether both parents are working, what their already existing assets are, and what their costs of living look like. As a result, everyone will have a different amount of insurance that makes sense for them.
When it comes to deciding how much life insurance to have, I suggest that someone not just think about their current circumstances, but also what they think their future life will look like. Insurance companies will often require some sort of health evaluation in order to obtain a policy. Given that someone’s health status could change at any point, I suggest that people think about how much coverage they would like in the future as well. For example, a newly married couple renting an apartment and without children may not l need life insurance yet, but if they plan on having children and buying a home in the future then they will likely want insurance at that time. So, if they are in good health it may be worth setting up life insurance plans ahead of time, as the cost of insurance is tied to one’s age and health.
Who doesn't need life insurance?
Someone may not need life insurance if they have no dependents, and they have enough assets that they could leave to beneficiaries that would more than cover funeral costs and final expenses. Also, some of these people may have life insurance benefits through work that they feel are adequate
If someone is considering life insurance, or would like to have their existing coverage reviewed, I would encourage them to speak to an independent financial or insurance advisor who can look at their situation objectively and provide recommendations without a bias towards a specific insurance company or product.
About Brett Sigler
Brett Sigler is a vice president and co-founder of Client Focused Advisors. He has worked in financial services since 2010, with a focus on life insurance, investment advice and financial planning. Brett lives in Stamford, CT with his wife and daughter.