Life insurance is one of those topics that can be uncomfortable in discussing with family, friends, and trusted advisors. How much is enough? How long will it be needed? Should we insure ourselves, spouses and children? Perhaps it’s not necessarily the topic of life insurance but discussing the needs surrounding life insurance that can make the conversation more difficult.
We’ve all heard “life insurance is for the benefit of your family and loved ones when you die”. And it’s true. We purchase life insurance to protect others, financially, if we meet an early death. The reality is our need for life insurance depends on our specific situation. Throughout our lives, situations change and so do our needs. The more difficult analysis is trying to understand how our needs change over time and align our life insurance with those changing needs. Life insurance has the potential to serve many financial needs from retirement income, long-term care, loan collateralization, estate planning, and wealth transfer, in addition to the financial security provided to loved ones. Skilled financial planners can help identify your changing needs and help formulate a plan to include life insurance as a foundational component of your plan.
Rather than restate the same arguments regarding income replacement with term life insurance, we’d like to explore common needs through everyday scenarios with which we can all relate.
There are two questions that need to be answered in order to determine how much life insurance is actually needed.
1. How much money will be needed at death to meet immediate obligations? Immediate obligations consist of:
2. How much future income is needed to sustain the household?
Every individual has unique and different needs. Meeting those needs and covering your obligations is vital to both your own financial future and the security of your loved ones. Almost every individual should have some form of life insurance coverage that protects their financial interests. The need for life insurance is situational, and throughout our lives our situations change. So, shouldn't our life insurance change as well? Of course our life insurance should change to meet our changing needs. The difficult question is HOW should it change?
Below we have identified a few common groups of people to outline some of their typical needs for life insurance to explore the HOW question as it may specifically relate to them.
For families, Life Insurance is almost 100% necessary because most families rely on two incomes to cover their living expenses. If one suddenly died, could your family cover the cost of rent or mortgages, daily living expenses, and continue to plan for the future? 70% of families with children under the age of 18 would have trouble paying bills just a few months after the death of the primary breadwinner. 40% would have trouble immediately. (LIRMA)
Life insurance safeguards your family's financial obligations as well as their future. You have to consider lost income, retirement, college funding, daily expenses, and the goals that you and your spouse have established. The need for life insurance for families lies in your children's future, spouse and the goals and obligations that you must fulfill. In the unfortunate event of an unexpected death, don't let your family’s plans die with you. Please see our income replacement Calculator.
A trend that has caught popularity in many small businesses is purchasing life insurance to plan for an unexpected death. Having a well-defined plan set in place could ease the pain of an untimely death for your business, the business partners, and loved ones. Upon an owner or partner death, funding to purchase the shares of the business benefits both the business and the heirs of the deceased. Often times the surviving owner needs immediate additional funding to purchase the shares from the deceased heir’s. The death benefit from a life insurance policy may also provide the necessary funding needed to hire or retain a qualified individual to fulfill the obligations of the deceased owner. Make sure that your business is able to survive in the right hands, even if you are no longer around.
Single parents work hard! They are the ones who provide income, caregiving, rides, food, and so much more. A surprising 40% of single parents do not have life insurance and the ones that do, say it is not enough. There is an enormous amount of responsibility that single parents carry. Having life insurance will defend your loved ones from the financial harm that follows an unforeseen death.
As a single parent, life insurance is very important. It will act as a vehicle to put your kids through college and secure them financially so that they can have a successful future. How would your kids settle your estate, pay for college, a funeral and continue to live in financial security if there was an unforeseen death?
Single parents do many things on their own and they have worked really hard to accomplish what they have. If there is an untimely death you have options to safeguard your family’s financial future and goals through life insurance.
Stay at home parents work hard and take on many crucial roles. Being able to fulfill those rolls if there is an unexpected death can be costly and challenging. In 2018 the median annual salary of a stay at home parent was equivalent to more than $162,000. (salary.com) Despite not having an income, stay at home parents add tremendous financial value to a family. They cook, clean, take care of the house, kids and so much more. Replacing a stay at home parent is virtually an impossible task and having the coverage to reduce this exposure is essential.. Having the financial security to replace a stay at home parent is highly important for the structure and financial planning of a family.
Many couples do not consider life insurance until they have children. While having children increases the need for insurance, many couples still need life insurance to cover their obligations. If you or your spouse died could you cover the debts of credit cards, car loans, student debt, and monthly living expenses? This would be a big challenge for couples that rely on two incomes to make ends meet.
If you are planning on having children, purchasing life insurance before you do so will safeguard your marriage obligations and future family. If you are younger and healthier, rates will be more reasonable. Additionally, many companies do not allow women to get life insurance when they are pregnant. Make sure to plan ahead and protect your loved ones.
For retired individuals, the need for life insurance can be challenging and many financial advisors misguide their clients. Your situation changes entirely when you retire and many financial advisors are looking for ways to cut unnecessary expenses so you can fully enjoy what you have built over the years. This is what PFSI would recommend as well, however, when you retire you still have obligations to fulfill.
One major obligation that many advisors overlook is estate settlements. If you have a large estate and even if it is all paid off, the heirs of that estate will likely pay a 45% tax on that property. This could cause your loved ones to liquidate your assets at a loss. Essentially, life insurance will give your heirs the financial means to pay the taxes on your estates, and properly manage the properties. If they want to keep the properties they can do so without being financially harmed by the death tax. If they want to sell the property, life insurance will allow them to sell your estates at the right price and at the right time. If your heirs are rushed to sell your estates it can be extremely costly and they could potentially lose hundreds of thousands of dollars.
The need is situational, and it depends on the size of your estate, and your net worth. The death benefit that comes with life insurance will allow your loved ones to have a funeral, cover taxes on your property, and pay off any outstanding debt you may have, without liquidating assets at a loss.
See our blog on how life insurance becomes an asset and changes over time. We have a great case study of an individual who was retired and leveraged his asset for capital gains and future security. Click Here
The need for life insurance is not as great for a single individual but it is still important. Many single individuals purchase life insurance so that their debts and obligations are not carried by their family or loved ones. If you have credit card balances, student loan debt, mortgages, car loans, or any other outstanding debt you will pass it on to your loved ones. Life insurance will allow you to cover your debt, pay for a funeral, and grant you security in knowing that you will not financially burden your loved ones.
Many single individuals support their parents or plan on having the funding to support their parents in the future. What would happen to their support and financial security if something happened to you? Secure your family and their best interest with life insurance.
Age and health play a major role when concerning the monthly rate of life insurance. Most single people are young and healthy furthermore they will get the best rates. Getting life insurance when you are young and healthy is our best recommendation. Your life can change and so will your health. For optimal rates get coverage as soon as possible.
Death is not the most pleasant topic to ponder but having a proper plan set in place will ease the pain of your loved ones. Change is always going to be certain, the only variable is rate. Purchasing life insurance is the most robust way to plan for the rate of change and add security to your constantly changing obligations. The biggest take-away from this blog post is that our needs and obligations are constantly changing and so should our view of life insurance. We are always going to have obligations to fulfill at every stage of our lives. Life insurance is the optimal vehicle for fulfilling those obligations.
When purchasing life insurance make sure to remember you and your family’s immediate financial obligations, as well as the future income needed for stability.
As we have stated many times before, the needs of every individual are different and we all have unique obligations to cover. Understanding your needs and fully grasping the insurance industry is what we are experts at. PFSI has a goal to get you the right coverage, at the right price, with the right advice.Contact Us