Your Money or Your Life Insurance

When my husband, Jeff, and I retired, we dropped our life insurance policies. Even though our daughter was still in high school, we had already saved all we were going to save. The income generated by our savings would be there regardless of whether we were alive, and we had no work related income to replace.  We didn’t need life insurance any more.

I have had the pleasure of telling a few friends they could cut their expenses by dropping their life insurance policies. Initially the reaction is a small gasp. It seems somehow sacrilegious to give it up if you are trying to live a financially sound lifestyle. But for these individuals, who happened to be single women with adult children, life insurance wasn’t a necessity. The kids were out of the house, and they didn’t need Mom to provide for them anymore.

Not everyone needs life insurance. Now you don’t see that statement very often. More often you see gloomy statistics, like less than 60 percent of Americans have life insurance, from a 2015 BankRate.com survey. Of the 40 plus percent of those who don’t have it, for some at least, there is a good reason.

You don’t need life insurance if you don’t have anyone depending on your income for support. The purpose of life insurance is to replace your income if you pass away. If any of these situations sound like you, you don’t need life insurance:

You are single and have no children to provide for. While many will miss you if you are gone, no one will miss your income.

You are single with adult children. The same goes here. Your children are grown and they can get along without you providing them with a life insurance benefit.

You are nearing the end of your career and you have the savings you need. As you get older, your savings grow and you have more equity in your home. These assets will help provide for those you leave behind. Therefore as you get older, assuming you are saving as you should, you need less and less life insurance, until eventually you need none.

You are a child. Children don’t need life insurance. They don’t have an income to replace. Some insurance companies sell policies pitched as a way to save for college. These policies are whole life policies that have a savings element. They develop a cash value over time which can be borrowed when your child is ready for college. But you would be better off just investing the amount of the premium in your state’s college 529 plan. All of the money will go to savings rather than providing life insurance coverage that you don’t need.

If none of these situations is you, you probably need some life insurance, but the amount you should have could be different depending on your situation.

You have young children. Those who have young children need life insurance the most and need the most life insurance. They are most likely to be under insured. The life insurance provided by your employer will definitely not be enough. You will want your children to be raised with the comfortable lifestyle that you hope to provide for them, and you don’t want to make life financially difficult for your spouse or their guardians, whichever the case may be. The younger your children are, the more financial support they will need. LifeHappens.org has a good calculator that takes into account all of the relevant information to help you determine how much life insurance you will want to put in place.

For this situation, term life insurance is all that you need. Term life insurance provides coverage for a specific period, like ten or twenty years. Your premiums will be the same throughout the term. At the end of the term you can renew or allow your policy to lapse. You can also cancel your policy at any time without penalty. Term policies are the lowest cost form of life insurance. They are perfect for most people, whose need for life insurance declines over time.

Do not make your minor children beneficiaries of your life insurance policy. Insurance companies won’t pay out a benefit to anyone under the age of 18. Name your spouse, your children’s guardian or a family trust as the beneficiary instead.

You are married and your lifestyle is dependent on your income. It is worth having a discussion with your spouse about how he or she would want to live if you were gone. Would he want to stay in the house, or downsize? Are there debts to pay off? What income could he expect from working? If your spouse could not maintain his or her lifestyle without your income, even if you don’t have children, you need life insurance. If your spouse is working or reasonably could work if you were gone, you won’t need as much. If you have debt that will need to be paid off, you may need more. Term life insurance will do in this case as well.

You have outstanding private student loans.  If you have outstanding private student loans, someone may be liable for their payment after you die. If you a parent, grandparent or someone else cosigned for your loan, they may still have to pay the debt after your death. If you live in a community property state and took on the loans after you married, your spouse may still have to pay. You should have enough life insurance to cover the repayment of those outstanding loans. If you are a parent cosigner or you took out a Parent Plus loan, you can take out a life insurance policy for the amount of the loan on your student. Again a term policy will work just fine here.

You are retired, married and have a pension that you and your spouse depend on for living expenses. If you have a traditional pension plan, payment may end when you pass away. While this can be avoided in most plans by choosing a joint life payout (meaning that the pension will be paid over both your life and your spouse’s), some do not make that choice because it lowers the monthly payments. If you have chosen a payout over only your own life, you will need life insurance to replace your pension payment if you die before your spouse.

In this situation, permanent life insurance is a better option. Permanent policies are, as the name suggests, permanent. They provide coverage for your entire life as long as you make the premium payments. These policies are much more expensive than a term policy. But as you get older, term life polices get more expensive, and eventually insurers may be unwilling to issue you a policy. With a permanent policy, such as a whole life policy, your premiums will remain level throughout your life regardless of your health. As mentioned previously, these policies also have a savings element, because over time they accumulate a cash value, but the most important factor is that you can count on continuous coverage.

Whole life insurance will likely cost you more than the difference between a single and joint payout on your pension. So if you haven’t taken your pension yet, simply choose the joint life payout instead of counting on life insurance to make up the difference.

Not everyone needs life insurance. As our kids grow up and our savings build, our need for life insurance gradually declines until it no longer exists. For the time that you do need life insurance, for most people a simple low cost term life insurance policy is all that you need. Don’t spend any more money, or spend it any longer than necessary, on life insurance.

Image courtesy of Vlado at FreeDigitalPhotos.net

 

 

 

 

 

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