Life Insurance – Who Needs It?

Family portrait
Purchasing life insurance has become a personal-finance decision more people are considering. That’s because fewer are receiving life insurance as an employer-paid benefit. Or, they can lose it during layoffs, which are the new normal in a volatile economy. Like all topics in personal finance, life insurance is a complex one. This blog will focus only on who really needs to purchase it. The issue is important because those who need it and don’t have it risk financial ruin. At present, according to LIMRA, only about 44 percent of households have an individual life insurance policy. On the other hand, those who don’t need it and are paying for it could be using the funds for other purposes, such as paying off college loans.

Essentially there are two types of life insurance. One is whole life, which can function as an investment vehicle. It tends to be relatively expensive. As its name “whole life” indicates, it extends for one’s entire life. However, because of its cost, in hard times, policy holders often wind up dropping it and not replacing it with the lower-cost and more flexible option – term insurance. That’s a serious mistake.

Cost of healthcareFor the cost of a latte or two a week, a healthy male can purchase life insurance for a “term” of 20 years with a payout of about $500,000. The good news here is that over the years, the cost of term life insurance has been going down. Term life can be a perfect fit for him since his financial obligations to his two children will end in 20 years. After that he may decide not to carry any life insurance, especially since the cost of even term goes up substantially with age.

This man is typical of those needing insurance. He has dependents. Without dependents and if his wife is employed, he might opt for no insurance. Most single people ignore – and rightly so – buying life insurance. However, this man with no children and a working wife may decide he needs life insurance as his aging parents become financially dependent on him. He may buy whole life instead since he cannot predict how long they will live and would prefer to also be building a nest egg for them.

Another kind of scenario is the affluent person or business owner whose funds will be tied up in probate upon death. They would likely purchase insurance policies as part of their estate planning. Those funds would be available immediately. They can pay the one-time cost of burial, debts, and the ongoing usual expenses. That carries the heirs and the business over until the estate is settled, which could take months or even years.

Some people who carry high credit card balances consider buying life insurance so that family members, none of them dependent, aren’t saddled with the debt. That’s unnecessary. Unless anyone has co-signed those accounts or the state is a community property one, the credit card balances are automatically eliminated upon death.

Decisions become more complex financially as a person ages or health problems develop and the dependent situation changes. The wife may lose her job after 20 years. She can’t get another one. Without the husband’s income, she couldn’t manage to make ends meet. A child becomes disabled. Because of all these possibilities, some opt for purchasing and making sacrifices to hold on to a whole life policy when they are young and healthy. This provides peace of mind, in the event of family reversals.

Of course, once the decision is made to purchase life insurance, then come all the other choices, such as how much coverage is enough, what distribution channel should be used to make the purchase, and what information is objective and trustworthy. However, what matters to prevent financial catastrophe is for those who need life insurance to not delay in getting it. Because, unlike auto insurance, this is a voluntary purchase, so there’s a tendency for people to drag their feet. That could lead to a financial disaster.

Photo credit: Shutter Daddy / Foter / CC BY-NC-ND

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