Life Insurance – Who Needs It and How Much?

life insurance

Life Insurance – Who Needs It and How Much?

Life Insurance – Who Needs It and How Much? 2560 1709 AMA Team

Life Insurance – Who Needs It and How Much?

Everyone needs life insurance. It doesn’t matter if you’re 20-something or in your 50s, married or single, have kids or don’t. There is a reason that every adult should have some type of life insurance coverage. 

Here’s what you need to know. 

What is Life Insurance?

Life insurance is a contract between the policyholder (you) and the insurance company. The insurance company promises to pay your beneficiaries a lump sum of money when you die. They promise this in exchange for the premiums they charge.

Many life insurance policies also accrue a cash value which policyholders can use while they are alive. It’s one of the most important pieces of your financial plan, providing you with peace of mind that your loved ones will be cared for when you’re gone.

Why is Life Insurance Important?

Life insurance is important for many reasons. Most importantly, it leaves your loved ones with nontaxable income that provides for them upon your passing.

Beneficiaries can use the money to pay off the mortgage, pay off existing debts, and/or as income to live off of for the foreseeable future. It’s one of the best ways to provide for your loved ones when you are no longer here to do it yourself. 

who needs life insurance

Who Needs Life Insurance the Most?

Many people assume they don’t need life insurance. They either figure they have enough money saved or they don’t have anyone who relies on them so life insurance isn’t necessary.

This couldn’t be further from the truth. Everyone could use life insurance, but the following people need it the most.

Families of all Sizes

If anyone depends on you financially, you need life insurance. It provides income replacement for your loved ones. This is important if you are the breadwinner or even if you’re the stay-at-home parent.

You both provide monetary value to the family. The breadwinner provides in obvious ways (bringing home a paycheck). A stay-at-home parent provides valuable services that upon his/her passing, the spouse must replace. For example, the surviving spouse may need to pay for childcare, a housekeeper, or someone to prepare meals. 

Life insurance proceeds could cover these costs while allowing the surviving spouse to continue working and providing for his/her family.

Parents with a Special Needs Child

Special needs children need care for much longer than 18 years. Parents often buy life insurance policies to ensure their child has enough money to survive and get the care he/she needs upon the parent(s) passing.

Homeowners with a Mortgage

If you own a home and still have a mortgage, the life insurance policy could cover the mortgage. If the surviving spouse can pay off the mortgage and have money to cover the real estate taxes for at least a few years, he/she can maintain the quality of life they’re used to without issue.

Business Owners

Life insurance proceeds can cover business expenses too. It can pay off your business expenses (they don’t just disappear when you die) or help a business partner keep the business running upon your passing. Making your business partner the beneficiary of a policy ensures that he/she will have the funds to hire employees to do the responsibilities you took care of when you were alive. 

Who Else Needs Life Insurance?

The list above covers those who need life insurance the most, but as we said above, everyone needs life insurance. Here are the ‘others’ who could use life insurance as well.

Divorced Parents

If you’re divorced and pay child support to another spouse, you could take out a life insurance policy to cover the child support payments. This ensures your children continue to get the financial support they need even upon your passing.

Anyone with a High Net Worth

If you have a large estate, your loved ones may face hefty estate taxes. This decreases the amount of money they receive upon your passing and could leave them in trouble. A life insurance policy can offset the taxes they owe (life insurance proceeds are tax-free), enabling them to cover the taxes and have enough proceeds from your estate.

Anyone Without Enough Savings for their Funeral

Life insurance can cover the cost of a funeral, which can cost $10,000 or more. If you don’t have enough saved or don’t want your loved ones using up your estate to cover your final expenses, life insurance can cover the cost.

Anyone Who Wants Supplemental Retirement Income

If you’ve maxed out your retirement plans and have more money to invest, a permanent life insurance policy provides another tax-advantaged way to earn money for retirement, and supplement the money you already have saved.

how much life insurance

How Much Life Insurance do You Need?

Each person needs a different amount of life insurance. If you want/need to cover a specific event, such as pay off a mortgage or cover a child’s college education, you can take out a policy for that amount. Maybe you want to leave a few years of income for your loved ones until they get back on their feet, or you want to leave a legacy for your grandchildren. 

Most people take out a policy that’s 10 or 20 times their current salary. This may or may not work, depending on your situation. If inflation rises significantly, this could leave your loved ones with less buying power than you anticipated. 

If you have kids and want to leave them with money for college, you may consider buying a policy worth 10 times your salary plus $100,000 for each child’s college education.

Overall, you should consider the following when choosing you’re the right amount of life insurance to buy:

  • Debts and liabilities – Think long-term, not just today. If you have a mortgage, how long will you have it? If you have other loans and credit cards, will they be paid off in the short-term or will your loved ones be left with them upon your passing?
  • Income – Make sure your family has at least enough years of income as you want to provide them upon your passing. Is it 2 years, 5 years, 10 years, or more?
  • Mortgage – Make sure your policy more than covers your total mortgage balance.
  • Education – Include enough money to cover your children’s potential education costs. 

FAQ

1. Is it really necessary to have life insurance?

Most people (even wealthy people) find life insurance necessary. It provides financial peace of mind that ensures your loved ones will be financially comfortable even upon your passing.

2. What are the different types of life insurance?

Term life insurance is the most basic life insurance option. This temporary policy covers your beneficiaries only if you die before it expires. You can usually buy term policies for 10 – 30 year terms.

Permanent life insurance is a more flexible policy that offers not only a death benefit for your entire life but also accrues a cash balance that earns interest and sometimes pays out dividends. You can use the cash policy to supplement your retirement income, pay for medical expenses if you fall ill, or even take out a loan on it for other expenses.

3. At what age should you get life insurance?

The best time to get life insurance is when you’re young (in your 20s or 30s), but it’s rarely too late. The younger you are when you apply for life insurance, the cheaper the premiums will be, but there are always options even for those who aren’t young and healthy. 

4. Does life insurance payout if you don’t die?

Term life insurance doesn’t payout if you don’t die unless you become critically or chronically ill and you have an applicable rider on the policy.

If you have permanent life insurance, though, you may use your cash accrual if your policy is paid up. Any money you use decreases your death benefit, but if it provides you with necessary finances while you’re alive, whether in retirement or if you fall ill, it can be helpful.

5. How much life insurance can you have?

There aren’t legal limits regarding how much life insurance you can carry, but you’ll typically be maxed out at 25 times your annual salary.

Get your Life Insurance Today

Don’t get caught without life insurance. It’s one of the most important ways to protect your loved ones. Even if you have adequate savings and think you’ve provided for your family, life insurance covers your funeral, final expenses, any legacies you want to leave behind, and income substitution for your loved ones. Get in touch with us today to enquire about life insurance options.

Life insurance is one of the most affordable ways to buy peace of mind. Your loved ones have enough to deal with when they lose you, leaving them financial protection is the best way to ensure their peace of mind while they grieve your loss.

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