Who Needs Life Insurance? A Guide For Parents, Retirees, And More
Whether you're a new parent or a single adult, you can benefit from the financial protection that life insurance can provide. In this guide, we'll outline the benefits of life insurance and why you might need it. We'll also answer the most frequently asked questions on this matter.
Understanding Life Insurance
Life insurance pays out a death benefit to beneficiaries if the insured individual passes away during the coverage period. The death benefit, or the face value, varies depending on the individual's contract with the life insurance company.
Types Of Life Insurance
Life insurance can be broadly categorized into two types: permanent life insurance and term life insurance. Here's a quick description of each:
Permanent Life Insurance
Permanent life insurance provides coverage for the insured person's entire lifetime, as long as they keep up with premium payments. Permanent life insurance policies usually have a cash value component that grows over time.
There are a few types of permanent insurance to choose from:
Traditional/ordinary whole life insurance: This is the simplest type of permanent insurance. You pay a fixed amount of premiums monthly or annually and receive a set benefit. Its cash value grows based on the dividends you receive from the insurer.
Universal life insurance: This is a more flexible type of insurance that allows you to “customize” your premiums and coverage levels depending on your current financial situation. You can pay more when you have extra funds, or pay less if you’re struggling financially.
Variable life insurance: This type of policy has a savings component that you can use to invest in stocks, bonds, and money market funds. However, if your investments don't perform well, your death benefit may decrease.
Variable-universal life insurance: This combines the benefits of universal and variable policies. It allows you to adjust your premiums and the death benefit, while also having a savings component that you can invest.
Final expense insurance: This type of insurance is specifically used to cover funeral costs and other end-of-life expenses. It has a smaller face value compared to other types of life insurance.
Term Life Insurance
Term life policies are only active for a specific term, like 1-30 years. If you allow the policy to terminate or expire, your beneficiaries can no longer claim a benefit from the insurer. You may also renew your term insurance or convert it to a permanent plan.
Who Needs Life Insurance?
To decide whether you need life insurance, assess your current life stage and responsibilities. If any of the following situations apply to you, you should seriously consider buying life insurance.
Young Adults With No Dependents
Getting a life insurance policy can help your family pay off student loans or credit card bills in case you pass away unexpectedly. Your family can also use proceeds from the life insurance policy to pay for your funeral expenses, especially if you have little to no savings.
There are other advantages that come with buying a policy while you're young. Due to your age, you're entitled to cheaper premiums. That can save you a significant amount of money, especially if you have plans to get married, start a family, and buy life insurance in the future. Additionally, buying insurance while you're still in good health also makes you eligible for larger face values.
Life insurance policies are primarily designed to replace the income of a breadwinner after their death. Their family can use the benefit to cover their daily living expenses, fund their education, or pay off the mortgage balance on the family home.
Depending on the size of your life insurance policy, your family can also use the proceeds to cover their financial needs for the next 5-10 years. Make sure to consult a financial advisor to determine exactly how much insurance coverage you’ll need as a breadwinner.
In the event that a stay-at-home parent passes away unexpectedly, the surviving spouse may need to turn to professional child care services. This can amount to $16,000 per year or more for a full-time child care program.
With life insurance, the surviving spouse will have the money to hire a professional to care for the children. Keep in mind, though, that a non-working parent can only qualify for life insurance coverage up to 25 times the working spouse's salary.
Parents Of A Special-Needs Child
For most parents, their need for life insurance diminishes as their children get old and become financially independent. However, if you have a special needs child, you'll need permanent life insurance products to ensure that your child can receive adequate care even after you're gone.
To ensure that the proceeds from your policy will be put to good use, you can designate a Supplemental Needs Trust to be the beneficiary of your policy. This will allow your child to continue receiving government benefits, while the Trustee uses money from the policy to take care of the child. Make sure to consult an attorney before finalizing your life insurance options.
New Homeowners With A Mortgage
When you take out a mortgage to buy a house, you may need life insurance. In fact, many lending institutions require you to have a life insurance policy to approve your loan.
Mortgage life insurance is designed to cover your mortgage balance in case you pass away before it’s paid off. Keep in mind that your beneficiaries are only entitled to the benefit if you die while the mortgage is still active.
If you own a small business, you should strongly consider getting a life insurance policy. The proceeds from your life insurance policy can help keep the business afloat while your colleagues look for someone who can replace you. Your business partner can also use proceeds from your policy to purchase your shares from the company. This is called a buy-sell agreement.
High-net-worth individuals may need life insurance to help their heirs pay inheritance taxes. This way, your children don't have to take money from your assets and can inherit the full value of your estate. If you're purchasing insurance for this purpose, make sure to get one with lifetime coverage – your heirs will be able to claim the benefit no matter how old you are when you pass away.
Keep in mind that laws on this matter vary depending on your state, so consult an estate planning professional first.
As you get older, you are more likely to develop a disability or illness that prevents you from completing activities of daily living (e.g. eating, toileting, dressing). Unfortunately, long-term care is expensive.
According to data from the US Department of Health & Human Services, you might spend $6,844 per month for a semi-private room in a nursing home. You might also end up spending $3,628 per month if you opt to stay in an assisted living facility.
If you don't want to pay for these expenses out-of-pocket, you might want to buy insurance. Whole life policies can come with a rider that allows you to use your insurance policy to pay for long-term care.
Retirees may need final expense life insurance to cover their funeral expenses. According to the National Funeral Directors Association, the median funeral costs for an adult can reach $9,135. A final expense insurance policy can easily cover this amount or more.
Insurance companies usually release the proceeds from this policy within a few days, making it easy for your family to start arranging your memorial service as soon as possible. Additionally, your loved ones can use proceeds from your final expense life insurance policy to pay off your outstanding debts, including your balance from credit cards or personal loans. They can even use the money to replace their own income as they take time off to grieve.
How Much Insurance Coverage Do You need?
Once you've determined your life insurance needs, the next step is calculating how much coverage you should get. This is the amount of money that your spouse or dependents will receive if you pass away during the coverage period.
If your goal is to have insurance replace your income, you have to multiply your annual salary by the number of years you want coverage for. Many people get enough to cover their families’ expenses for five, ten, or twenty years.
You should also add up the balance from your student loans, credit cards, and other financial obligations. Your beneficiaries will be able to use the benefit to pay off any outstanding debts you may leave behind.
For those who are purchasing insurance to cover their funeral expenses, consider shopping around and asking for quotes from funeral homes. Most final expense insurance is capped at $25,000, which is usually enough to cover funeral costs as well as medical bills or debt.
Frequently Asked Questions On Life Insurance
What if I can’t afford life insurance?
If you can't afford expensive premiums, you can purchase a term life policy. This type of insurance comes at a cheaper rate because it only provides coverage for a certain period. It also doesn't accumulate cash value.
There are also cheaper subcategories of term life insurance, such as decreasing term policies. This type of insurance has a death benefit that goes down as your financial obligations also decrease. You can discuss this option and other ways to find affordable life insurance with your agent.
I have a group policy from work – should I buy an individual policy?
A group life insurance policy from your company can be extremely useful because your employer pays for some or all of the premiums. However, keep in mind that if you lose your job or move to a different workplace, you will also lose your insurance coverage. You may want to buy life insurance on your own so that your family is protected even if you quit your job or retire.
In many cases, the face value from a group plan is also not enough to replace your income for several years. If you want to provide your family with long-term financial protection, it's best to get an individual policy.
How do I apply for life insurance?
The first step is to find an insurance company or an independent agent who can help you get insured. It's more advisable to find an agent because they can provide you with a wider range of options depending on your needs.
Once you've determined which type of insurance you want to buy, you'll have to provide the insurance company with your personal information, social security number, family health history, and medical history. Some types of life insurance may require you to take a medical exam.
Keep in mind that the policy will not be in force until you pay your first premium.
Can I buy life insurance for another person?
Yes! If you have a spouse who needs life insurance, you can purchase one for them. You can even purchase a policy for a parent, a child, or a business partner.
Who can I list as a beneficiary?
Beneficiaries can be any person or entity. For example, you can list your spouse as the beneficiary, so that they can be entitled to claim the death benefit. An organization or business may also be listed as a beneficiary.
As a rule of thumb, it's best to avoid naming your estate as the beneficiary of your life insurance. The proceeds from your insurance can significantly drive up the value of your estate, forcing your heirs to pay high estate taxes.
Make sure to keep the insurance documents in a safe location and inform someone of where they are. Your beneficiaries will need it to make claims in the future.
Life insurance is an indispensable tool that can give you and your family lasting financial security. However, many people (incorrectly) think that only working parents can benefit from a policy. The truth is that retirees, business owners, stay-at-home parents, and even young people without dependents may also benefit from getting life insurance.
If you want to learn more about how insurance can help you reach your personal goals, get in touch with Wesley Insurance, LLC. We can help you find life insurance products that will protect your family or business.