Beginner’s Guide to Life Insurance Part Two: Who Needs Life Insurance?
As the new year begins, it’s customary to take a look at the year ahead and mindfully make resolutions. We think about goals to set, and changes that will make our lives more healthy, productive, and financially stable than the year before. One such change that can have a long-term effect on your family’s financial stability is adding or adjusting a life insurance plan.
The concept of life insurance is confusing to many people, though, so this beginner’s guide aims to demystify it. In the first edition of this three-part series, I outlined the different types of life insurance and where to obtain coverage. Now, I give you points of consideration and resources to help you decide if you need life insurance.
What to Ask Yourself When Considering Life Insurance
Here are seven questions to ask yourself when determining whether or not you need life insurance:
1. Do I have enough liquid assets to cover my debts and loans in the event of my death?
These liquid assets mean cash in the bank, not retirement funds. If you owe money, you want to make sure that you have enough cash to at least partially cover the obligation in order to give the beneficiaries of your estate enough time to either sell the asset or assume payments. If you are unmarried and without children, you might be surprised with what happens to debts and loans when you die — especially without a will. Dying without a will is called “intestate.” The state that you live in would then appoint an executor for your estate to decide what happens to your assets, and it’s usually a close relative. Here’s an example: You may think that your auto loan institution would just come and repossess your vehicle, but having cash on hand allows your executor to make payments on that car (ideally without having to touch their own savings to do so) while they decide whether or not to sell the car or keep the car. While you might be ok with leaving your car to someone, they might not be ok with inheriting your monthly payment so you need to make sure you can pay what you owe in the event of your death.
If you are married or have children, you should consider whether or not your significant other or family members would be able to continue paying your debts without a life insurance payout.
2. Do I have enough cash to provide for the cost of a funeral?
The average cost of a typical funeral in the United States is between $8,000 and $10,000. Are these funds readily available to cover this cost, and if not, does your family have a financial plan in place to pay for your funeral?
3. Is anyone dependent on my income? Whether the dependent is your child, your parents, or someone else, if they rely on any part of your income then you need to factor how much they would need in your absence and for how long.
Even if your spouse is employed, few couples could survive on just one income. When I ask couples to evaluate this question, they frequently underestimate the amount of money that they “need” each month. In reality, your family would “need” about 85 percent to 100 percent of its current income in order to maintain the same or similar standard of living in your absence
4. Do I want to leave my family in the same position they are in now, or am I ok with knowing they would need to adjust their lifestyle to get by?
Whether adjusting a lifestyle by downsizing expenses or increasing income by returning to work or seeking out new employment, determine whether your family is prepared to do this in your absence.
5. What, if anything, would need to be sold to maintain my family’s standard of living?
You should have a comprehensive understanding of all of the assets that your family would have access to in your absence — such as property, stock, business investments — and the willingness and process of your family to sell these assets.
6. Would my partner and/or children be able to stay in our home without my income?
Really think about this question in both the long- and short-term. If your partner would not only need to sell your home eventually, but need to sell it immediately, this can put he or she in a tough negotiation position to get a fair market value.
Can my family still afford the children’s education?
Even if your children are not yet college age, tuition fees loom in the future. Does your family have a plan to pay for this without your income?
Who Doesn’t Need Life Insurance?
Most people are in need of some type of life insurance at various points in their lives. The amount and type of insurance needed changes throughout one’s life, and some insurance plans can be designed to flex with your needs over time.
Life insurance might not make financial sense for everyone. Though you should consult with a financial advisor before waiving the life insurance benefit, having all four of these factors might mean you do not need life insurance:
- Lack of consumer debt
- Ample assets to pay for funeral expenses
- Ample assets to provide any income needed by beneficiaries*
- No estate tax obligation
*It is important to note that retirement assets are still considered retirement assets when you die, which means that they may still be subject to the same taxes and penalties as if you were alive and taking an early distribution. Because of this, don’t assume retirement assets should be used for income purposes without first consulting with a financial advisor.
You can — and absolutely should — conduct research before deciding whether or not to purchase a life insurance policy, and which policy to purchase. I recommend these resources and exercises as a start:
- Life Happens is a great source of information and research. Take a look at the needs analysis calculator on this site to help you assess your family’s long-term cash flow needs.
- Analyze your family’s current monthly cash flow analysis, and then create a mock cash flow as if you or your spouse were not there. This will help you see exactly what the deficit each month would be. Add in costs of final expenses, college tuition for the kids, mortgage payments, and any other long-term expense on the horizon.
- Speak to a financial advisor. Her expert advice will help you navigate not only if you need life insurance but also what to look for in a policy.
Advisory services offered through Investment Advisors, a division of ProEquities Inc., A Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is independent of ProEquities, Inc.
Katie Waters is a member of the DailyWorth Connect Program. Read more about the program here.