Do I Need Life Insurance?

Deciding whether or not to purchase life insurance is an important part of the estate planning process. However, the need for insurance coverage can vary greatly based upon your individual circumstances.

Typically, life insurance is used to replace lost income in the event of your death. A sizable life insurance policy is a necessity if you have a spouse, child, or a disabled parent who is financially dependent upon your income. Term life insurance is very affordable for young people who are in reasonably good health yet wish to obtain a larger policy to provide for their dependents in the event of premature death.

Deciding whether or not to buy life insurance for a stay at home parent can be a trickier task. Although stay at home parents aren’t earning an income, they are often still providing valuable services. If your spouse would need to hire someone to care for your children and manage your home in the event of your death, choosing to purchase a small life insurance policy is a wise decision. Of course, money received as the result of a larger policy could always be placed in a trust for the children.

While life insurance is a necessity for anyone with dependents, business owners should also consider the importance of life insurance. If you are the sole owner of a business, consider how much money will be needed to run your day-to-day operations in the event of your death. If you expect to have one of your heirs continue the business, you’ll need enough insurance coverage to keep the company functional during this transition period.

If you are unmarried, have no children or dependents to support, and don’t own a business, a large life insurance policy is generally an unnecessary expense. However, many people do opt for minimal coverage to ensure that there will be enough cash available to pay for their funeral expenses and any applicable estate taxes. Whole life insurance, universal life insurance, and other forms of permanent life insurance can also be used as investment vehicles, although many financial planning experts caution against investing in a cash value policy.

If you have decided that you do need to purchase life insurance, the next step in the process is to determine how much coverage you need. First, consider how your loved ones will pay for funeral expenses and any debts that you would leave behind. Then, consider how much money they’ll need for living expenses and how long it will take them to become self sufficient. If your children are very young and you have a spouse who has never had a career outside of the home, for example, you’ll need much more coverage than someone who has children about to start college and a spouse with a well-established career.