Do You Really Need Life Insurance?
Sometimes it stinks to be the grown-up. Case in point: life insurance. If there’s anything worse than thinking about your own death, it’s doing math problems about it. Bring up the topic of life insurance with a young parent and you’re promptly dismissed with one of two responses—blind confidence or abject guilt. Whether they own a policy on themselves or not, parents seem to embrace the idea that they should. But probe deeper, ask why someone does or does not have life insurance, and it becomes clear that most people have not considered all the variables. Parents of young children may feel better if they have a policy, but life insurance is not appropriate or necessary for every family. The decision to buy life insurance doesn’t come down to numbers alone, but understanding the value of income and assets goes a long way toward making the right choice.
Imagine a Future Without You
The idea behind life insurance is that when others depend on your earning capacity, you want to enable them to continue their current standard of living when you die. Planning for long-term maintenance is difficult, and not only due to the math. The anxiety produced by this emotionally charged speculation is probably the reason so many of us delay the life insurance decision, but this worry is exactly what life insurance is designed to alleviate. Add up all your family’s expenses, and don’t forget the replacement cost of childcare if one parent stays at home to care for very young children. Once you know how much your family needs on an ongoing basis, look at sources of assets and income, such as:
· Any source of inheritance
· Employer-sponsored life insurance benefits
· 401k accounts, pensions, and Social Security benefits
· Earning ability of surviving spouse or other caretakers
· Available support from siblings, grandparents, or other extended family
Consider how long it would take for your children and the surviving parent to become self-sufficient. To make the best choice, you will want to conduct a detailed inventory of your finances and lifestyle. For that, an objective professional opinion can be invaluable—even if you have to pay for the advice. (Know that if you’re talking to an insurance agent, you are likely to be hit with an emotional appeal, and as with most money matters, feelings only cloud the real issues at stake.)
Review Your Bank Statements
It is natural to think of all the years ahead for your young family, such as how they will they maintain the mortgage and cover the cost of a college education. While long-term needs are important, think about the short-term expenses too. Survivors may need cash immediately to cover:
· Debts of the deceased
· Funeral expenses
· Income or estate taxes.
Determine how much money your family could realistically get their hands on right away. If you have savings to cover the above expenses, you may not need a policy that provides immediate cash proceeds. However, if most of your property is to be transferred by will, it could be tied up in probate for months. Business owners also need to consider the business obligations survivors would face. Think about the assets your survivors could they sell (or be willing to sell) to pay the bills. Depending on your circumstances, a policy that covers short-term expenses may be all you need, or you might want to provide for your family for years to come.
Don’t Forget Social Security
The future of Social Security retirement benefits are uncertain, but life insurance is intended to support your family if something were to happen to you today. Should you die before your unmarried children reach adulthood, they may qualify for survivors’ benefits. According to the Social Security Administration, the value of these benefits is probably greater than any individual life insurance policy. The amount your family would receive is based on the number of years you have worked (and paid into Social Security) and on your age at death. There are special considerations for children who are disabled, for older children still in school, and for stepchildren and adopted children.
The life insurance decision can be complicated, but if a policy allows you to believe for certain that everything will be just fine when you’re gone, and the expense of the premiums don’t adversely affect your lifestyle the answer is easy. On the other hand, some can’t afford the peace of mine bought by life insurance, and many don’t need it. Even when the calculations get messy, learning about your life insurance options is worthy of your time and attention. You are the grown-up, after all.
Lela Davidson is a former CPA and the author of “Blacklisted from the PTA.” Read more on www.afterthebubbly.com.