Life insurance is tricky. There are scenarios in which it’s vital to your family, but there are also instances when it may no longer be needed. If you have term life insurance, there may be a time when having it no longer makes sense. Cash-value policies, on the other hand, accumulate value and provide coverage you won’t outlive – as long as you keep up the premiums. Whole life, variable life and universal life are three of the flavors you can choose. Even cash value insurance shouldn't just sit there, however. See 6 Ways to Capture the Cash Value In Life Insurance for advice on making sure you don't leave money in your policy that should go to you or your heirs.
Not everyone needs life insurance. Those who’ve accumulated enough wealth and assets to care for their own and their loved one’s needs independently in the event of their death can forgo paying for life insurance, especially if it's a term policy. On the other hand, there are people whom experts say should never be without a life insurance.
Whether you’re just married, domestic partners or celebrating your 20th anniversary, you and your significant other have planned a life based on a certain income level. Unless each of you is able to maintain that income level on his/her own, it’s important to have life insurance to prevent a drastic change of lifestyle when one of you dies.
This is true even when you're both still employed, if both partners hold jobs. Some spouses or partners may want – or need – to take an extended break from working following the death of their loved one. Life insurance affords that chance to grieve or readjust to new life circumstances, says Jason R. Tate, ChFC, CLU, CASL, owner of Jason Tate Financial Consulting in Murfreesboro, Tenn.
A home mortgage is one of the largest asset and liability on a person's personal balance sheet. If a homeowner dies before the mortgage is paid off, beneficiaries and the lender can be protected by the proceeds of a life insurance policy, says Tate. “The lender wants to know that the mortgage payment can be covered and the beneficiaries need the ability to keep the house payment paid and prevent the second tragedy of being forced out of their home while grieving.”
New Parents/Parents of Minors
A new baby is a source of pride and excitement. It’s also a tiny person who, for the next 18 years – more, if he or she goes to college – is financially dependent on you.
“At the core of that is the responsibility for both parents to provide for a surviving spouse and child or children,” says Tate. “Life insurance provides tax-free money to surviving spouses or guardians and children for income replacement, debt payoff which allows the family to maintain their current lifestyle.”
Life insurance planning should look beyond a child’s first 18 years, Tate emphasizes. Parents wanting to provide for their children’s college education in the event of their passing should consider that expense when determining the amount of life insurance to purchase.
The loss of a child could be very devastating for a family and have parents wanting, or needing, to take time off of work. On top of that emotional toll, there are funeral and burial costs to deal with. “It’s uncomfortable for parents to imagine, but families should be protected with life insurance in the event of the tragic premature passing of a child,” says Tate.
Many times a minor child can be added to an adult's policy via a child rider endorsement at a low cost. “That rider can typically remain in effect until the child reaches age 18,” says Tate.
Other policy alternatives include purchasing a whole life policy that a child can have for the rest of his or her life. “That provides insurability guarantees regardless of health,” says Tate.
Parties to a Divorce
A trip down the aisle rarely includes plans to uncouple. But should it happen, don’t be surprised if the judge or mediator suggests both spouses purchase life insurance on themselves for the benefit of the other spouse if minor children or financial responsibilities exist post-divorce.
“The policy coverage might extend for a certain period, making term insurance an appropriate fit for the situation,” says Tate.
Business Owners and Partners
A new business comes with inventory, investment and, many times, debt. “In order to provide solvency, business owners must protect their personal and business interests with life insurance in the case of a premature passing of an owner,” says Tate. Insurance on the owner could help the surviving spouse weather the transition until the business can be continued or sold.
If you have a business partner, that person is the equivalent of your professional spouse. Just like your domestic partner, business partners need to be protected with life insurance in the event of the other’s demise, Tate explains. Insurance should cover each partner and establish how a transition will occur if one of them dies.
“When a business partner passes away, money helps purchase the remaining stock, or business interest from the deceased's estate or family. This assures business continuity for business customers, and creates an estate that immediate establishes value on the asset for the decedent's estate,” says Tate.
For more on this see How To Create A Business Succession Plan, which includes discussion of the role of life insurance.
Those Wanting to Leave a Financial Legacy
Generous relatives who want to pass on money to their beneficiaries for legacy purposes should purchase life insurance. Whether grandparents wants to provide for their grandchildren’s education or an individual wants to fund medical equipment for a local hospital, life insurance can provide money to beneficiaries, usually tax free, according to Tate. For more details, see How are life insurance proceeds taxed?
The Bottom Line
There are many good reasons to carry life insurance – though it's not a must for everyone. For more information, read How Much Life Insurance Should You Carry? If you want to know more about whether it's time to stop your policy, read The Best Type Of Life Insurance For You Right Now.