Is life insurance really necessary? If you're considering if it's worth it or not for you, there are six main reasons you should know why life insurance is important. As you read the explanations below, think about how each of the key reasons applies specifically to you and your family.
Purchasing life insurance is a personal decision, just like investing. There are also many price ranges and different types of life insurance available to best fit individual needs. Even if you don’t need life insurance today, it’s important to know when and why you could benefit from it later.
1. Dependent Care
I'm a father of two kids, and I worry about them all the time. If you’re a parent, you likely do the same. We love our children so much and are constantly thinking about protecting them.
Not only do we want to keep them safe, and give them the best childhood possible, we want to see them grow into successful adults and have kids of their own someday.
The very last thing you want is for you or your spouse to pass away prematurely before your children have grown and established financial and lifestyle independence.
Even if you have someone who could assume guardianship of your kids if you die, they may have insufficient financial means to support them.
We're also living longer and one or both of your parents could fall under your care for many years as well. If you died unexpectedly from something like a car accident, how would your parents be cared for? Nursing homes and long-term care are extremely expensive.
Having a life insurance policy can protect all the dependents in your care and provide a secure way to ensure the costs to care for them are covered.
2. Asset Protection
If you've had a successful career, chances are you've been building and purchasing assets along the way. Perhaps you have a house, rental property, vacation home, business, car, art collection, investment portfolio, etc.
When you die and your assets pass into your estate, your heirs may be financially forced to sell some or all of those assets to settle outstanding debts and cover expenses.
Life insurance can protect your assets by providing a cash death benefit that your beneficiaries can use instead. A life insurance death benefit gives them flexibility to keep the assets you worked so hard to attain or sell them at a future date if they wish.
Even if your heirs want to sell certain assets, it could take time to offload illiquid assets such as real estate and business equity. Keep in mind that other assets, such as jewelry, may sell for less than their appraised value as well.
3. Replacement Of Lost Income
One in three US households report they would have immediate difficulty affording living expenses from the loss of a primary wage earner.
Are you a primary wage earner in your household? If you pass away unexpectedly, the loss of your income could be devastating to your family.
Life insurance provides financial protection for your beneficiaries so they can grieve in peace and not worry about how to afford bills and can maintain as much normalcy in their lifestyle as possible.
How much life insurance should you get? Just like with retirement planning, how much life insurance you need depends on you as an individual and the needs of your dependents.
A general recommendation is to get a policy that is 6 to 10 times your annual salary. You may find a smaller policy is sufficient for your needs or vise versa.
4. Day-To-Day Living Expenses
The most common reason people purchase life insurance policies is for the financial protection they provide surviving family members.
Calculate the total monthly living expenses your family spends on average. Utilize free financial tools to help you track and analyze your spending, and grow your wealth while you're still alive.
Next, consider how many years of monthly living expenses you'd want to leave your beneficiaries if you passed away.
Examples of day-to-day living expenses that you'll want your life insurance policy to cover include housing, food, clothing, medical insurance, dental insurance, utilities, childcare, education, transportation, household products, and entertainment.
5. Unpaid Debts
The average American consumer owes about 10% of their disposable income to non-mortgage debt such as car loans, credit cards, student loans, or personal loans.
The average US household credit card debt balance alone is around $9,000. That’s a lot of money given the average credit card interest rate is in the mid-teens.
What happens to your debt when you die? Depending on variables like the type of debt, where you live, and if you have a co-signer, your family could be held responsible for any unpaid debt balances when you die.
Outstanding medical bills are one possible example, but the laws are complex and consulting an attorney is recommended if you anticipate having a lot of medical expenses.
Typically the assets in your estate are used to cover debt balances when you die. Only certain types of debts like Federal student loans are forgiven outright when you die.
A life insurance policy can provide your beneficiaries with the funds necessary to quickly settle your accounts stress-free.
6. End Of Life Expenses
Nobody likes to talk about death or planning for funerals. Coming up with a plan now, and letting your family know your wishes, however, can make the process much less stressful for your loved ones when the time comes.
Many people also don't know how expensive funeral expenses are until they need to make arrangements for a lost family member. Funeral costs can vary widely based on where you live and the products and services used.
Burials typically cost about $10,000 – $12,000 but can easily climb into the $20,000 to $30,000 range, or even up to $50,000.
Final expense insurance is one type of life insurance that can be used to provide funds to cover funeral services when you die. Term life insurance is much better value, however, and can be used to cover end of life expenses and much more.
Key Takeaways
There are six main reasons why life insurance is important to so many people.
- Dependent care
- Asset protection
- Replacement of lost income
- Day-to-day living expenses
- Unpaid debts
- End of life expenses
Life insurance provides financial protection of your assets, debt balances, lost income, and money to cover a wide range of expenses.
Get Free Life Insurance Quotes
Thanks to technology, it’s easier than ever to compare term life insurance policies. The most efficient and free way to get competitive life insurance quotes is to check online with PolicyGenius. They are the #1 life insurance marketplace where qualified lenders compete for your business.
You can quickly search for policies across multiple carriers through PolicyGenius’s online portal for free. I’ve know the founders of PolicyGenius for years and they have truly build a fantastic resource for individuals.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has a total of $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.