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Life insurance isn’t one-size-fits-all, and the right policy for you will depend on where you’re at in your life. There are also a few situations where you might be able to do without life insurance — like if you have enough savings to self-insure.
What's in this guide?
- When do most people get life insurance?
- Who needs life insurance?
- Who doesn’t need life insurance?
- Is there a perfect age to get life insurance?
- What types of life insurance are available?
- Compare life insurance companies
- What to consider when buying life insurance
- How much life insurance do I need?
- Bottom line
- Frequently asked questions
Who needs life insurance?
These people often have the greatest need for life insurance.
Someone with co-signed debt
- To take care of their debt. Unfortunately, your debt doesn’t die with you. If you have co-signed debt, you might want to buy a policy that covers the cost – just in case you die before paying it off.
- To replace their income. If a breadwinner dies, their policy can kick in to help their family to pay for their living expenses and maintain their lifestyle.
- To maintain cash flow. A life insurance policy can provide much-needed money and a financial protection if a key player dies. It can also be used to fund buy-sell agreements.
- To ensure their family can pay the mortgage. Many homeowners take out a policy that lasts as long as their mortgage. That way, if they die, their loved ones will have the money they need to make repayments.
- To pay estate and inheritance taxes. If your estate is worth more than $11.4 million (the IRS threshold for 2019), it may be subject to federal estate taxes. A life insurance policy can give your heirs the money they need to cover those taxes.
- To pay someone else to do the tasks they perform daily. Stay-at-home parents often do a lot of unpaid labor, like cooking, cleaning and ferrying the kids around. If they die, their life insurance policies can help their family to hire someone to take over those duties.
Who doesn’t need life insurance?
You might not need life insurance if these situations apply to you:
- You don’t have any financial dependents. If you don’t have a partner, spouse, child, aging parents or anyone else relying on your income, you may not need a policy right now.
- You don’t have any debt or major assets. Many people purchase life insurance to cover their outstanding debts and protect their assets — such as a house — when they die. But if you don’t have those kinds of financial obligations, you could hold off on buying coverage until you do.
- You have the money to self-insure. If you have sufficient savings, healthy retirement accounts, assets and well-performing investments, you might be able to self-insure. This simply means that your loved ones would be able to pay for their living expenses and financial needs using the accounts and liquid assets you already have. Life insurance is designed to replace your income, but if you can provide your family with cash flow another way, you might not need a policy.
Is there a perfect age to get life insurance?
No. Many people get life insurance after a major milestone, such as having kids, buying a house, getting a new job or getting married. But the level of coverage you need will depend on your income, expenses and needs — and it might make sense to adjust your coverage as you age.
|Age||Life events||Financial obligations||Types of insurance to consider|
|55 and Over|
What types of life insurance are available?
The main types of insurance available are:
- Life insurance. In a nutshell, life insurance pays out a lump sum benefit to your beneficiaries when you die. There are two main policies to choose from: term life insurance offers protection for a set period of time, like 10, 20, 25 or 30 years; while permanent life insurance lasts your entire life and has a cash value component. The most common permanent policies are whole life, universal life and variable life.
- Disability insurance. The truest form of income protection, this kicks in to offer monthly benefits if you become fully or partially disabled and can no longer work.
- Critical illness insurance. This coverage provides a lump sum benefit if you’re diagnosed with a critical illness that’s specified in your policy. Most policies cover up to 40 different conditions, including stroke, cancer and heart attacks.
- Funeral or burial insurance. Designed to cover end-of-life expenses, this policy pays out a one-time lump sum benefit.
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What to consider when buying life insurance
When you’re deciding how much coverage to buy, ask yourself:
- How many people depend on me financially?
- How long could my dependents survive financially without me?
- How long will it take for my children to become financially independent?
- Are the assets I’m leaving behind worth enough to take care of my family?
- How much debt am I leaving behind?
- Would my business flop if I was no longer around?
Do you still need life insurance if you’re retired?
As you inch closer to your retirement, you’ll likely have less financial obligations — and therefore, less of a need for life insurance. But a life insurance policy can help you to:
- Leave an inheritance to your children or loved ones
- Pay for funeral expenses, legal fees or taxes
- Cover any outstanding debts
Ask an expert: How important is life insurance if I already have healthy savings and retirement accounts?
Life insurance, health savings accounts and retirement accounts are all designed to serve different needs.
Health savings accounts. Whether it’s a Flexible Spending Account (FSA) or a Health Savings Account (HSA), these vehicles offset the cost of health insurance deductibles. Unlike an HSA which can be accumulated in one year and “banked” for future use, FSAs have to be used for expenses incurred during the calendar year in which the funds were accumulated. In most cases, the amount of money that can be accumulated in either account would not be enough to provide the kind of protection the next two types of policies would.
Retirement accounts.These are intended to be used while a person is alive. They offer a flow of income during a person’s retirement to allow them to maintain their lifestyle when they’re no longer working.
Life insurance. This protects against the untimely death of a person whose income is needed by their beneficiaries. Money can never replace the loss of a loved one, but it can create the time and economic security needed for someone to make future decisions.
Ask an expert: How important is life insurance if I already have healthy savings/retirement accounts?
Life insurance is a very important part of any good financial plan. When you solely rely on growing your savings either via a retirement account or any other financial savings vehicle, you’re counting on the idea that you’ll live long enough to be there to fund that account.
In addition, there are usually tax consequences when accessing money from retirement funds. But with life insurance in place, a beneficiary is guaranteed 100% of the death benefit tax-free, and there is no need to go through or wait for the probate process to take place.
Life insurance is the best way to replace income lost due to an unexpected death.
How much life insurance do I need?
Once you’ve determined a need for life insurance, the next step is figuring out how much coverage to buy.
To crunch the numbers, add up the cost of your financial obligations and assets, including DIME: Debt, Income, Mortgage and Education. Then, aim to take out a policy with a face value to match.
Another simple way to calculate coverage is to multiply your annual salary by five or ten. So, if you currently earn $50,000, you might buy a $250,000 or $500,000 policy.
If you have children or loved ones who depend on you financially, a life insurance policy can help to provide for them when you’re no longer able. Compare life insurance policies from different insurers to find the coverage that best suits your needs and budget.
Frequently asked questions
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