Life Insurance – Why You Probably Need It and What It Can Do For You
What will be your legacy if you died today? Though it may be a heavy thing to ponder, it’s precisely the question to consider when weighing options for life insurance coverage.
If you’re wondering whether or not you need life insurance, maybe the most important question to answer is: will anyone be adversely affected financially if something happened to me? If you are single, healthy, and completely debt-free, you might be the only one who could safely answer no to this question. Even still, you may want to cover your funeral costs at the very least. For all the rest of us, life insurance can be a safety-net for our loved ones in the event of our death, providing financial security at the time they’ll need it most.
What is life insurance? Simply put, life insurance provides a specific tax-free monetary benefit to your chosen benefactor(s) in the event of your death. There are two main types of life insurance policies: term and permanent.
- Term life insurance – provides coverage for a specific time period—typically 10, 20, or 30 years—and if no death occurs within that time, the policy expires.
- Permanent life insurance – provides coverage for an entire lifetime (as long as premiums are paid on-time, of course), and at death, the benefit is paid to your designated benefactor(s). These policies have a cash value that accrues over time and can be withdrawn or borrowed against.
There are different forms of term and permanent life insurance policies and each have their own sets of pros and cons which we’ll explore in more detail in our Life Insurance 101 blog post. For now, we’ll focus on why life insurance is needed and what it will provide.
Reasons for Life insurance – The Why
Generally speaking, life insurance is essential if:
- You want to provide for any outstanding bills, ongoing expenses and funeral costs
- You want to leave a gift to charity or to loved ones
- You have co-signed debt
- You have mortgage and/or credit card debt
- You want to replace your income for your spouse and/or children in your absence
- You have a legacy you want to protect
- You want your family business to continue after you’re gone
- You want to provide for your family’s future needs such as college, retirement, etc.
What Life Insurance Provides
With a good life insurance policy in place, you can be sure that your loved ones will be provided for in your absence. The tax-free death benefit from any type of life insurance policy can be used for many things including:
- Long-term care for spouse and dependents
- Paying off mortgage and other debts
- Retirement savings for spouse
- College tuition for dependents
- Paying estate taxes
- Covering funeral costs
- Keeping a family business running
In addition to the death benefit, permanent life insurance policies typically include a savings component that accrues value over time and can be used as a living benefit to withdraw or borrow against. Some permanent policies can even compliment your investment portfolio.
How Much Coverage Do I Need?
To determine how much coverage you’ll need, begin by considering the following factors:
- Your budget
- Your future financial and family plans
- Your current health
- Your current income, assets and debts
- Any policies already in place
Budget – Term life is typically less expensive and might be the perfect option for young families, anyone with debts and/or mortgage payments, if you’re the primary earner in the family, and if you’re divorced or have dependents to provide for.
Future plans – Will you be planning a family, buying a home, or building a business? A life insurance policy can help secure these investments, ensure that your family will be financially sound, and that your business will be able to continue on, should something unexpected happen to you.
Health – As we age and our health gets a little more complicated, rates can increase drastically. It’s a great idea to lock in low rates while you’re young and healthy when possible. If your health is not optimal, there are policies with guaranteed acceptance and no health exam required that can be explored.
Current income and debts – Determining how much coverage you need begins with looking at which debts you’ll want to cover and how many years of your salary that you want to supplement for spouse and/or dependents.
Policies already in place – If you currently have a life insurance policy, especially if it’s part of your employment benefit package, it’s probably a good time to review your benefits and see if they need to be supplemented. You may be able to add supplemental insurance through work, but you may also find it less expensive to purchase an additional or a separate policy altogether. For more information on when/why to supplement your employer-provided group plan, read this blog post.
You can use an online calculator to help you determine your ideal coverage amount–we like this one from lifehappens.org. Once you know how much coverage you need, you’ll want to choose the right type of policy (find out more about the different types of life insurance on our Life Insurance 101 blog post) and get some quotes for comparison. You can use eIndividual’s online tools to get instant quotes for term and whole life insurance. Or better yet, give us a call and let us do the legwork for you!
At eIndividual, we are dedicated to helping you secure the life insurance coverage you need so that you can have peace of mind. We know that with all the options and information out there, the process can be somewhat daunting. Our qualified, friendly brokers are equipped to answer your many questions and help you craft a plan that will serve you and your family for a lifetime.
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Crystal Clark is a full-time animal lover and change maker.