The main reasons most people have life insurance are to pay final expenses (medical, funeral, burial, etc.), replace an income stream and/or create wealth for our dependents after we die. Life insurance can also play an important role in business, estate planning and charitable giving.
When considering whether or not you need life insurance, think about what would happen to your loved ones if you should die today. Most people would agree if you have children (babies through college age) you need life insurance, but those who depend on us financially may also include our spouse, aging parents, siblings, and other family members with special needs.
Here are some ways life insurance can be useful at various stages in our lives.
Young Single Adults: If you have no dependents, you may only need enough life insurance to pay your final expenses and debt so your family will not have that burden. However, if you help support an elderly parent or another person, life insurance can replace that financial support. Life insurance is much less expensive when you are young and healthy, so if you anticipate getting married and having children some day (and your budget allows for it), buying some life insurance now would be a smart thing to do.
Married with No Children
At this point, both partners are probably working. If one should die unexpectedly, one income may not be enough. Life insurance can provide cash to pay final expenses, pay down credit cards and other loans, and help with mortgage payments and ongoing monthly expenses—at least until the survivor can make lifestyle adjustments. Again, if you are thinking about having children in the future, it’s not too early to buy life insurance.
Married with Dependent Children
Adding kids to the scenario multiplies our financial obligations. In addition to final and regular ongoing expenses, life insurance can pay off a mortgage, fund college educations and provide for the surviving spouse’s retirement, easing the financial burden on the surviving parent and even allowing a stay-at-home parent to remain at home with the children. If a stay-at-home spouse should die while the children are young, life insurance can provide the funds to hire someone to help with child care, shopping, cooking, transportation, cleaning, and other household responsibilities. At this stage, it makes sense to have life insurance on both parents.
Single parents already have the work and responsibilities of two people. Life insurance can provide the financial protection and security your family would need.
Business partners often have buy-sell agreements that are funded with life insurance; when one dies, the proceeds can be used to buy the other’s share of the business from the deceased owner’s family. “Key man” insurance can be purchased on the life of an employee or partner whose role in sales or management is very valuable to the business; if this person dies, money would be available to help keep the business going while a replacement is found. Life insurance can also create an inheritance for all children, including those not working in the family business.
Empty Nesters and Retirees
Life insurance can help provide for the surviving spouse’s retirement and potential medical and long-term care expenses. Existing and new life insurance policies can also be used to make charitable gifts, and to fund private foundations and trusts for future generations. Life insurance can also pay estate taxes, preserving the rest of the estate for family members.