When I tell someone they no longer need to carry a life insurance policy, they often give me a befuddled look. Then they say something like, “But…I’ve paid into it all this time. I can’t just cancel it. I haven’t gotten anything out of it yet.”
Somehow we don’t say this about other types of insurance.
Take the example of insuring a recreational vehicle. Assume after ten accident free years, you sell the recreational vehicle. You wouldn’t say, “But I’ve paid into all this time. I can’t just cancel it.”
No, as a matter of fact, you’d probably feel quite relieved that you had ten safe years, and never had to deal with deductibles, or claims adjusters.
Life insurance is different, I suppose, because we are all rather attached to our lives.
What you must remember is, as strange as it may sound, life insurance is not bought to insure your life. After all, I’m sure you’d agree, your life is priceless, and no amount of money would be enough to insure it.
What life insurance is intended to insure is the financial loss, or hardship, that someone would experience should your life end.
The following five questions will not only help you determine if you still need life insurance, but what amount of life insurance you may need, and what type of life insurance may be right for you.
Do You Need Life Insurance?
Will someone experience a financial loss when you die? If the answer is no, then you don’t need life insurance.
A good example of this would be a retired couple with a steady source of retirement income from investments. Their income would continue in the same amount, regardless of the death of either spouse.
Do You Want Life Insurance?
Even if there will be no substantial financial loss experienced upon your death, you may just like the idea of giving up some income now so that family, or a favorite charity, will benefit upon your death.
Life insurance can be a great way to pay a little each month, and leave a substantial amount to a charitable cause.
What Is The Right Amount of Life Insurance?
Think about your situation, and the people who will experience a financial loss if you were to die today. What amount of money would allow them to continue without experiencing such a loss? That is the amount of life insurance you need.
How Long Will You Need Life Insurance
Will that financial loss always be there? Probably not.
If you’re in your peak earning years, and you’re not around, it may be difficult for your surviving spouse to save enough for a comfortable retirement.
But once retired, the family income should be stable, if the source of the income is not dependent upon either life. If this is your situation, then you only need insurance to cover the gap between now and retirement.
What Type of Life Insurance Do You Need
Will the financial loss upon your death increase, or decrease, over time?
When the financial loss is limited to the gap years between now and retirement, then the amount of the loss decreases each year as your retirement savings grows larger. A term insurance, or temporary policy, is perfect for these situations.
But if you own a thriving small business, and have a higher net worth, your estate may be subject to estate taxes. As the value of your estate grows, the potential tax liability gets larger. This financial loss increases over time.
In this case, a permanent life insurance policy, such as a universal policy, although more expensive, will allow you to keep the insurance longer, providing your family with cash to pay estate taxes so the business does not have to be liquidated.
Permanent insurance is also the right choice for any life insurance policy that you want to be sure pays out, even if you live to be 100. An example would be life insurance for the benefit of a charity.
Situations Where Life Insurance Is Needed
- Couples in their peak earning years, saving for retirement.
- Retirees who will lose a substantial portion of the family income when one spouse dies.
- Parents with non adult children.
- Families with a large, illiquid estate, who’s estate will be subject to estate tax.
- Business owners, business partners, and key employees employed by small businesses.