Life insurance, like other types of insurance, is meant to fill a gap in your financial portfolio. It’s meant to provide cash at the time of your death so your loved ones can manage expenses incurred as a result of your death. As of September 2014, the average traditional North American funeral costs $7,000 to $10,000. Your policy may also need to support dependents for a period of time following your death due to the loss of your income. While life insurance has many other estate and financial planning applications, in this post we want to discuss the fundamental use of life insurance to meet financial needs at the time of death.
The Profiles of People Who Need Life Insurance
The new mother or father – It’s never too early to begin planning for your child’s future. Every new parent should consider new or additional life insurance to provide for their child and the surviving parent at the time of their death.
The caregiver of an elderly parent or child with special needs – If your elderly parent relies on you to support them you should consider a life insurance policy to provide for your funeral expenses and their ongoing care. Similarly, if you are the parent of a child with special needs, whether that child is school aged or an adult, if they will likely require your support for the rest of their life, you will want to have a life insurance policy and/or additional financial planning in place to provide for their care when you die.
The single mom or dad – As the only breadwinner in the home, your children rely one hundred percent on your earning ability. It’s important that you have a life insurance policy in place to continue to provide towards the care of the children. The younger the children, the more coverage you will need.
Both adults in a one-income household – If you are in a two-parent, one-income household because one parent cares for the children and home, you’ll want insurance policies for both of you. For the income-earner, it’s obvious that there will need to be replacement income for a period of time after death and to allow the surviving parent to recover.
It’s also important to insure the caregiving spouse. Should something happen to this person the surviving parent will incur additional expenses as a result of childcare and possibly other household services that will now be out of pocket expenses.
The person with a lot of debt – If you carry a lot of debt, consider that your debt is a liability of your estate in most situations. Laws vary by state, but typically debts reduce the decedent’s estate. Debts are paid before family members are granted whatever you wished to pass along to them.
Unless a credit card or loan was co-signed, family members are not directly responsible for the debt. The exception to this is in “community property states” in which the living spouse may be liable for the debts of a deceased spouse even if they were not on the financial contract. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, married couples can treat their property as community property by agreement.
If you carry debt and will leave little or no assets when you die, consider a life insurance policy. Whether you live in a “community property state” or just want to make sure you don’t burden your family with the costs of a funeral service and burial ($7,000 to $10,000), life insurance is a smart family financial decision.
The mature adult without liquid assets – You may be wealthy in terms of non-liquid assets, owning property, artwork and jewelry that could be worth hundreds of thousands or millions of dollars. However, if you do not have liquid assets at the time of your death your loved ones could have trouble covering expenses. Given that life insurance is not subject to probate, it can provide the cash needed to cover funeral and burial costs without having to rush to liquidate property for potentially less than it is worth.
Keep in mind that if you own your own life insurance policy at the time of your death and your estate is subject to estate tax, so too is the life insurance payout.
The 2 Profiles That May Not Need to Purchase Insurance Now
The mature adult (65+) with adequate savings and enough liquid assets – If you do not have coverage in place, you may find purchasing coverage at this age is not a “good investment” for you, especially if no one is relying on the life insurance payout for income and other liquid assets are available to cover funeral expenses and any additional taxes and costs after death. Many seniors have policies in place that will provide a legacy to a family member, charitable foundation or institution – these policies may fund a trust or grant program and can provide for meaningful impact across generations.
The young adult without debt or dependents – Someone in their twenties with an apartment rental, used car and little or no credit card debt doesn’t likely need a significant amount of life insurance. Young adults should consider protecting their insurability by securing moderate coverage at this age where there are fewer medical issues and premiums are very low for their age bracket. Consider policies with an investment component. Another option would be to start to save towards retirement.
If you have questions about life insurance and what type of coverage might be the right choice for you, contact us for assistance.