When Do I Need Life Insurance?
There are three common misconceptions about when you need to purchase life insurance:
- You only need life insurance if you are married with children
- You don’t need life insurance when you are young
- You don’t need life insurance if you have mortgage insurance
Each of these beliefs is likely driven by one thing: mortality is not a common discussion topic. Everyone wants to believe an unexpected death won’t happen to them, or their loved ones. However, part of your Financial Advisor’s job is to make sure you have considered the worst-case scenario, to ensure your loved ones are protected.
First, let’s consider how life insurance plans are a key part of your comprehensive Financial Plan. Payable when you die, life insurance provides your spouse, children, or those who depend on you the funds that are necessary to help with a multitude of financial commitments that will still exist if you pass away. These responsibilities include (but are not limited to) repayment of debt, education costs, maintaining a standard of living, and funeral expenses.
Now, let’s take a look at each misconception:
Often you need life insurance, even if you aren’t married with kids! Life insurance is protecting those in your life who would be affected, financially and emotionally, by your death. Let’s consider Sandy Sample as an example:
- Sandy is a single 42 year old female who owns her own home worth $450,000. She earns a strong income of $85,000 per year, and has modest savings of $25,000. However, Sandy has $400,000 in mortgage debt, and has her mother living in her home. If Sandy passes away, her savings and the sale of her home would cover the debt. However, her mother will have nothing to supplement the loss of Sandy’s live-in support and income. Sandy will purchase life insurance to ensure all final expenses are covered, as well as to ensure her mother can continue to live comfortably if she passes away.
Even if you are young, life insurance is an asset worth paying for. It is part of your financial plan that should be purchased well before it is needed. Premiums on life insurance policies are often based on age, physical condition, personal medical history, and occupation. Generally speaking, purchasing certain types of life insurance when you are younger allows you to take advantage of significantly lower premiums, as these factors are more favorable at a younger age. Furthermore, when you are young you often have people who would require assistance if you were to pass away:
- Lion King is a 22 year old who just finished school. He landed a sweet job that pays him $42,000 per year. Because he was working as a bartender while he went to school, he has only $5,000 in student debt. Lion has very little debt, and very few expenses. However, because he wants to save an extra $25 per month instead of purchasing life insurance, his parents would suffer after his death. They would be grieving the loss of their son, and would miss days at work. They would have to find the money to cover his funeral expenses. A small life insurance policy would provide peace of mind for Lion King and his parents. It would ensure all final expenses are taken care of, as well as replace lost income for his parents.
Mortgage insurance is not the same as life insurance! There are a few key differences between the two should you pass away:
- Life insurance policies, whether it be one plan or a mix, provide constant premium levels and benefit amounts for the length of each policy. The payouts can be used for a multitude of items: to pay off the mortgage, cover final expenses, and help ensure loved ones are protected financially. However, mortgage insurance only covers the amount owing on your loan. Furthermore, your mortgage insurance payments will always remain the same, even though your coverage declines as your mortgage declines. Make sure to check with your advisor to determine what insurance mix is best for you!
Mortality is not a comfortable subject. This being said, it will comfort you knowing your loved ones are protected if the unexpected occurs.
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