Life insurance is one of those topics few people even want to think about, much less take the time to research the different types of life insurance policies, get quotes, and go through the process of buying a policy. Buying life insurance can be a hassle and it is something many people put off for too long (sometimes forever).
But I don’t think about life insurance that way. To me, life insurance gives me peace of mind, knowing that my family will be taken care of if something happens to me. And even though I am the primary breadwinner in our family, we maintain a life insurance policy on my spouse as well. We have a policy on my wife to help cover any final expenses policies that might arise, as well as to help offset the cost of her contributions to our household.
Should something happen to me or my wife, our respective life insurance policies would provide enough money to help us to maintain our current standard of living. That gives us a lot of comforts and freedom to pursue our life on our terms. In my opinion, life insurance is an essential part of a comprehensive financial plan.
Why I Have Life Insurance
They say a picture is worth a thousand words. This photo speaks volumes to me. This is my family and I on vacation in Hawaii a couple years ago.
I want my family to know that I will always be there for them. And I will. Even if the worst happens to me, they will always have the memories we made together. And their financial needs will also be taken care of. I can rest easy knowing they will be provided for, even if I pass away at a young age – my life insurance policy and our current investments will see to that.
We have a life insurance policy for my wife for the same reasons. The money would never be able to replace her contributions to our family and our household. But having that policy in place would make certain things easier, such as paying for childcare or paying for additional help around the house.
Reasons to Buy Life Insurance
Everyone has different needs when it comes to life insurance. My primary goal is to provide for my family if I pass away.
I bought my first life insurance policy when I learned my wife was pregnant. I bought a 30-year term life policy, and continue to make payments on it today. I bought a large policy and have periodically reviewed my coverage to ensure it still meets our needs (it does).
If you are on the fence about buying a life insurance policy, I encourage you to think about what it would mean to your survivors if you were to pass away without a life insurance policy in place.
- Would they be OK from a financial standpoint?
- Could they continue living their lives with the same standard of living?
- Would they have to downsize their home, sell their possessions, skip out on college or take out substantial student loan debt?
- Would they be saddled with final expenses, such as medical bills or funeral expenses?
- Would they have to change their life plans? (go back to work, take a second job, work longer before retiring).
When I ask myself these questions, it becomes evident that I absolutely need a life insurance policy. Having one gives me peace of mind and helps me sleep better at night. And my family knows that they will be covered in the event the worst happens.
Common Reasons to Buy Life Insurance:
In addition to providing for your survivors, there are many other reasons to buy a life insurance policy. Here are just a few of many:
To Cover Final Expenses (Medical & Burial Expenses): Medical bills and funeral expenses can easily run into the thousands of dollars. Hopefully, you will have medical insurance. But it may not cover everything. The average funeral now costs over $10,000. Some people choose to buy a burial insurance policy or final expense insurance. While a final expense policy may be helpful, it may not be adequate for your family’s other financial needs.
To Replace a Primary Income: I am the primary income earner in our family. And my family would not be able to cover our regular bills without my monthly income. But our life insurance policy would cover the outstanding balance on our mortgage and leave enough to help pay for living expenses for the next 20 years or so – until my wife would be able to start making penalty-free withdrawals from our retirement accounts.
To Cover the Cost of a Spouse’s Contributions: It’s a good idea to have life insurance coverage on a stay at home spouse, even if they don’t earn much (or any) income. Stay at home spouses often contribute in a wide variety of ways, including child care, running the household, cooking, cleaning, etc. You might be able to do it on your own, but having the financial means to hire help when needed can make a huge difference. This is especially important if you have children that haven’t yet begun attending school. Childcare is very expensive.
To Pay for Children’s Expenses: This includes childcare, as well as other school age needs, such as activities, sports, music, tutoring, or anything else that may crop up during a childhood. And of course, don’t forget about college expenses. College may be a ways off for your children, or it might be right around the corner. Either way, it’s very expensive. Having a life insurance policy may mean the difference between your child being able to attend college without worrying about the cost, or skipping college or taking out large student loans.
To Pay Off Any Outstanding Debts. Thankfully, my wife and I don’t have any consumer debt. Our only outstanding obligation is our mortgage. As I mentioned above, my policy is enough to pay off the balance, and still have some left over for bridging the gap between now and retirement. But each situation is different, so I recommend you look at any outstanding debts you may have and consider those when determining how much life insurance you need. Being able to pay off all debts would give your family a fresh start should the worst happen.
Another way to look at buying a life insurance policy – the last thing I would want to do is to pass away and leave my family holding the bag for debts that I owed.
Additional Reasons to Buy Life Insurance (Case by Case):
The above reasons apply to many common situations. But some people have additional reasons to consider a life insurance policy. Some of these include:
To Pay for Long-term Care for Special Needs Children. You may want to consider a large life insurance policy if your income is needed to support dependents long after your working life. This could include a child or someone else with special needs who will not able to support themselves. This is one of the few times when a whole life insurance policy is recommended over a term life policy, since the coverage may be needed to support a future generation.
To Buy Out a Business Partner’s Interest. Many business partners take out a life insurance policy on their partner to help ensure a more stable transition in the event one of the partners passes away while the business is still operating. This is often coupled with a buy-sell agreement that is triggered in the event of one partner’s death. This can help the business continue without trying to find a buyer for either the entire business or for the deceased partner’s shares. This also prevents the heirs from dealing with a business in which they may not have any interest or knowledge. This can be a complicated topic and is worth exploring with the assistance of a legal consultant that specializes in small businesses.
To Cover Estate Taxes. Estate taxes are expensive and can eat away a large percentage of the heir(s)’ inheritance. Many high net worth individuals use life insurance as an estate planning tool and a way to mitigate the cost of their estate taxes. Again, this is a more advanced topic and one that is worth consulting with an estate lawyer. This is also one of the few times that whole life insurance is recommended over term-life, since the policy will be in place through the policyholder’s life, and not just for a fixed term.
Life Insurance is Affordable
This is perhaps the best reason. Life insurance is generally very affordable, unless you have a serious pre-existing medical condition, or have been previously found ineligible for a life insurance policy. Even then, there may be ways you can get some life insurance coverage, through a no-exam policy, a mortgage life insurance policy, or some other types of policies.
Barring those reasons, most people can afford a reasonable life insurance policy that can provide protection should the worst happen. I recommend getting quotes from at least two or three life insurance providers to find the best policy for your needs.
Who Doesn’t Need Life Insurance
There are some people who don’t need life insurance. I didn’t have a life insurance policy on myself until I was married and had a family. Prior to that, there was no one who was relying upon my income for support. My family and friends would have mourned my passing. But no one would have been in the poorhouse from a lack of my income.
That changed when I got married and when my wife and I had our first child. I am currently about 10 years into a 30-year term life insurance policy. I hope to carry that policy until its term, then hopefully be in a position where I can let it lapse. By then, I hope to be financially independent and no longer need a life insurance policy.
By that time, I hope my children are grown, through college, and have families of their own. My mortgage should be more or less paid off by that time, and I hope to have sufficient investments to support myself and my wife for the rest of our lives. If we reach that point, we will no longer need life insurance.
Those two situations sum up the most common situations when you don’t need life insurance – when no one is relying upon your income for support, or you have already won the financial game and your assets or estate can provide for your heirs long after you pass away.
Which Type of Life Insurance Should You Buy?
The argument typically comes down to whole life or term life. The difference is whole life lasts for the person’s entire life, while a term life insurance policy only lasts for the “term” of the policy (often issued in 10, 20, or 30 year periods).
Term Life Insurance
Term life insurance is often recommended for most common life insurance needs. Term life insurance premiums are less expensive for the same value policy as whole life insurance. And most people don’t need a life insurance policy for their entire lives. If things work out well, your need for insurance will often decrease as you age, because fewer people are relying upon your income to support them.
Many people find they can go without life insurance after they reach a certain stage in life, often at or near retirement. Prior to that, their financial needs are often greater – paying for their mortgage, supporting a family, school and college expenses, saving for retirement, etc.
But financial needs are often less once children have left the home, the mortgage is paid off, and you are no longer saving for retirement. A Term life policy is a good solution for life insurance needs that follow this path.
Whole Life Insurance
Whole life insurance, on the other hand, lasts for your entire life, provided you current on your premiums. There are a couple downsides to whole life insurance, and it often gets a bad rap. But there are also times when it is the best form of life insurance for a specific person or situation.
First, the downsides – whole life insurance premiums are significantly more expensive than term life insurance premiums for the same amount of coverage. Second, many life insurance salesmen peddle whole life insurance as an investment. It’s actually not a good investment. Life insurance and investing should never be mixed. Life insurance should only be used as life insurance.
On the plus side, whole life insurance is good for situations when you will need the life insurance premium for your heirs, regardless of your age when you pass away. Two common situations were mentioned above – caring for a special needs dependent, and for estate planning. These are situations when the higher life insurance premiums are worth paying for the permanent policy that never expires.
Other Types of Life Insurance
There are other types of life insurance, but many of them are overly complicated. And in the financial industry, more complication often means added expense, regardless of whether or not it provides added value. Unfortunately, added expense also equals increased commissions, so some life insurance salesmen try to push these complicated insurance policies because they will make a bigger commission check.
Find your needs, and then work from there. Don’t let a salesman sweet talk you into buying something you don’t need.
How Much Life Insurance Should You Buy?
This is a big topic and one that doesn’t have a one-size-fits-all answer. There are several rules of thumb, such as 10 times annual income. But those types of rules of thumb can be overkill, or woefully inadequate, depending on your situation.
The better way to approach this is to consider what your expenses will be to care for your survivors after you pass away.
Your goal is to help your survivors maintain their quality of life after you are gone. So consider factors such as your current debt (mortgage, cars, student loans, and other loans), expected costs for dependents (daycare age through high school age, activities, college tuition and living expenses, etc.), how much of your income would have been used to support the family, etc.
This should be enough to get you started with the brainstorming process.
We have a full-length article that can help you decide how much life insurance to buy.
Take the time to think this through. Any life insurance is helpful. But it would be better to have adequate life insurance compared to too little.
You can also stack life insurance policies. For example, you can start with a 30-year term life insurance policy. As your needs grow, you can add another 20-year policy, then a 10-year policy. Or any combination, really.
This concept is becoming more popular and is recommended by Ladder Life, a life insurance company that allows members to add or remove life insurance policies as needed. This makes planning easier for many situations. You can learn more at the Ladder Life website.
In Summary – You Probably Need Life Insurance
We covered the two common situations when you don’t need a life insurance policy – when you have no one that needs your income for support, and when your assets are large enough to provide for your survivors long after you are gone.
Outside of those two situations, you probably need a life insurance policy. How much life insurance you need will completely depend on your situation. So I encourage you to run the numbers and do some deep thinking to come up with a number that makes sense for your situation.
As for the type of life insurance, term life is the best fit for most common life insurance needs. The monthly premiums are less expensive than whole life insurance premiums and hopefully, the policy will last until you no longer need life insurance as part of your overall financial plan.
If you anticipate needing life insurance for longer-term needs, then consider a whole life insurance policy. Just be sure not to confuse it with an investment policy. It’s not. It’s simply a life insurance policy with no expiration date. You’ll pay more for that privilege, but it may be worth it to help maintain your family’s lifestyle or support your estate after you pass away.
Next Steps – Take Action
I hope this gets you thinking. I want you to do two things if you think you need life insurance:
- Think about how much life insurance you need.
- Get a life insurance quote or two. You will be surprised at how affordable life insurance can be.
You can get started with a company such as HavenLife, Ladder Life, USAA, or others.
Here’s hoping you never need it.
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