Life insurance, like most insurances, is confusing and often complicated, even for those with financial backgrounds, to fully understand. Many people erroneously believe that life insurance is limited to people nearing retirement or parents with children. Life insurance is a good way to provide for those you leave behind, but it’s far from the only reason to have life insurance. While some people may not need life insurance, chances are it would be in your best interest to ensure that you’ve covered all bases.
Types of Life Insurance Policies
Whether rich or poor, young or old, navigating the waters of life insurance is sticky business. Even millionaires were found to have used their wealth to purchase life insurance policies that were the wrong type and for the wrong amounts for their needs.There are two basic types of life insurance plans available to consumers: term life insurance and whole, or universal, life insurance.
Term Life Insurance
Term life insurance is a policy that is in effect for a certain period of time. The term is typically 20 or 30 years. In addition, as one ages and comes closer to the likelihood of dying, the insurance policy increases in cost. Some policies, called level-term policies, average premiums out so that policy-holders don’t have to worry about yearly premium increases.
Whole Life Insurance
Whole life insurance is a permanent policy that stays in effect for the duration of a person’s life. Unlike term insurance, this policy offers both a death benefit and cash value. Premium payments help fund a savings account. For this reason, whole life insurance is much more expensive. If you have substantial wealth, you may be interested in having a cash-value policy that can be used to pay a charity of your choice or fund a second spouse’s irrevocable life insurance policy.
When You Don’t Need Life Insurance
There are four situations in which it may make sense to go without life insurance. These include the following:
- When your children are grown and independent
- You have enough income and assets to care for you and your spouse
- You have a small estate that doesn’t have to pay estate taxes
- Your estate is liquid enough to pay estate taxes
If you don’t have children or other dependents who require your care, then paying into a life insurance policy may not be worthwhile. If you are married and you and your spouse have acquired enough retirement income, social security, savings and other assets to cover all of your expenses, including cremation and funeral plans, then it may be okay to forego unnecessary life insurance policies.
Depending on the size and state of your estate, you need to be concerned with estate taxes owed. If your estate is small, then you may not owe estate taxes. In contrast, your estate taxes may be paid through the liquidity of your estate. Be sure to consult with an account or estate planner before making final decisions.
Who Needs Life Insurance
Life insurance is designed to meet a range of needs. Since there is no one-size-fits-all insurance policy, it’s wise to shop around. Consider the different types of policies and costs available and how they best meet your needs in your geography. Different groups of people can benefit from life insurance in different ways.
Couples and Parents With Dependent Children
The most common reason for life insurance is to help replace income lost when a primary breadwinner dies. This is especially important when the other spouse/partner is a homemaker or has little income, as well as when there are children involved. Today, many retired people are finding themselves caring for grandchildren, so all aspects of life must be considered.
One word of warning: Don’t name minors as beneficiaries. While this may seem to be the most logical thing to do, you may not realize that your children will not have access to the money until they are 18. This could jeopardize their well-being in the meantime. To overcome this issue, set up a life insurance trust to handle the money at any age.
Sick and Chronically Ill Individuals
Life insurance is often seen as only being relevant when a person dies. However, with the right insurance policy, you can cash in on your benefits in the unfortunate event you become sick or have a chronic illness that prevents you from working or caring for yourself properly. Your policy must include this living benefit as a policy extra or policy rider in order for you to use some of your policy’s cash value to help pay for living or medical expenses.
Those Without Prepaid Funeral Arrangements
Coming to terms with the inevitability of death is not easy. In spite of this, it’s imperative that you consider how things get paid for once you die. Many companies provide prepaid arrangements so that you can get everything in order ahead of time so that your loved ones don’t have to worry about it. Whether you would like to be cremated or buried, special funeral arrangements can be made using benefits from a life insurance policy.
Life insurance is a means of providing security for family members after you have died. Securing the right type and amount of insurance is vital to ensure that your loved ones are well protected. It can also help to provide funds for cremation and funeral planning. The first step is to fully understand the different types of life insurance and for whom they best serve. Without this understanding, you could find yourself either overpaying for insurance you don’t need, or not having enough.