Not everyone needs life insurance, but it’s a safe bet that most people could use some coverage at some point in their lives.
Life insurance comes in two flavors: term and permanent. Permanent will stick with you throughout your life — or as long as the premiums are up to date.
Term life insurance expires at some predetermined point.
So why wouldn’t everyone just buy permanent insurance and then have lots of insurance money to leave to their families at the end of their lives?
Mostly because it’s expensive. You’re likely better off just investing your money elsewhere.
Permanent insurance is most commonly used to minimize estate taxes. Most people don’t have to worry about estate taxes. This year they only kick in on estates worth over $3.5 million. Next year the taxes disappear altogether, though in 2011 they revert back to the $1 million threshold level used years ago.
But for people who need some cash to pay the taxman on their way into the afterlife, permanent insurance is one way to go.
Permanent insurance might make sense in some other instances, too. But such a purchase is subjective and based on the insured’s emotions and financial situation.
It all comes down to planning. Depending on your family structure, your approach to life insurance will be different from those of others.
- Single people
- Married with kids
- Married with no kids
- Domestic partners
- Single parents
Being unmarried doesn’t equal a lonely, sad-sack existence, and it doesn’t mean you should automatically skip life insurance.
Single people may want to have life insurance for many reasons, from providing for elderly parents who need caretaking to covering debts amassed throughout life.
If someone has co-signed a loan for you, for instance, for education or a home, they’ll be on the hook for the loan in the event of your untimely demise. With insurance, you can leave on good terms.
Life insurance can also be used to pay for your funeral costs should anything untoward happen.
Planning for your own funeral may seem morbid and dour, but with life insurance, you win if the policy doesn’t pay off.
“The good news is you’re still alive,” says Russell Fox, a Certified Financial Planner with Apex Wealth Management Group in Oxnard, Calif.
Of course, the insurance company also wins.
The type of insurance you purchase is purely a personal decision based on your health and income. Term insurance is a good bet for covering all your bases unless circumstances dictate having coverage for your entire life.
Don’t forget that many employers offer group term insurance as part of their benefits package, so a person with minimal life insurance needs may have their obligations met with just that amount of coverage.
“If they have that basic type of coverage, it could add piece of mind,” says Fox.
Group term life insurance could be less expensive than an individual policy, so it may be a good option. One potential drawback: It may not be convertible to an individual policy should you leave the job.
Married with kids
When a couple becomes three or more by the addition of a whippersnapper or two, they typically begin thinking of life insurance — usually term insurance.
Term insurance is perfect for families because it allows parents to decide how long they need to be covered. That might be, for instance, through their children’s college tenure.
“Term insurance is very inexpensive in its purest form. It’s an inexpensive way to accumulate a lot of life insurance,” says Certified Financial Planner Adam Sherman, president of Firstrust Financial Resources in Philadelphia.
The alternative, some form of permanent insurance — whether whole life, universal or variable life — is equally useful for providing a death benefit to survivors, but it is much more expensive. And not everyone needs insurance for their entire lifetime. Deciding how much insurance to buy is somewhat subjective but there are easy formulas for narrowing down how much you need.
“There are two distinct pools of money needed,” says Sherman. “There are cash needs which would provide for paying off all the debt, things you want to take care of at death, paying off your house, funding college education, doing things that you wanted to do but haven’t done,” says Sherman.
“The second part is my family’s need for a portion of my economic capacity to survive, so I would create another pool of money to create income for them for however long is needed,” he says.
Also, couples should consider the replacement value of a homemaker. Many times replacing an income is the only consideration in buying life insurance, but there is obviously an unwritten economic value to the homemaker role.
“Not to be sexist, but say the working spouse is the husband. Sometimes people don’t consider, ‘Well what if my wife dies? I still have to go to work, but who’s going to take care of the kids?'” says Fox.
“It’s not a paycheck, but there are house-cleaning costs, child-care costs, things that are not evaluated sometimes in terms of an economic benefit,” he says.
Married, no kids
A married couple without children is in a similar boat as their procreating counterparts. Even with no extra mouths to feed, spouses would probably want to provide for the surviving partner in the event of their death.
In today’s world, most couples enjoy a lifestyle that requires the income of both partners and term life insurance can help keep the surviving spouse in the lifestyle to which he or she has become accustomed. It can also pay for debt incurred together, such as a mortgage, home equity loan or credit card bills.
Term is a good bet for a couple of reasons. For one, it’s guaranteed for a set amount of time. A couple could have term insurance for the duration of their working lives.
By retirement, ideally the mortgage would be paid off, debt obligations should be less if not nonexistent and retirement savings, coupled with Social Security benefits, could be enough to sustain one partner should the other die first.
Buying term insurance while you’re healthy and relatively young can be an inexpensive solution to life insurance problems.
“Term insurance is dirt cheap because typically the insurance companies don’t have to pay out. I think the statistics are that about 2 percent of term insurance policies actually pay and that is why they’re able to offer it so inexpensively. They really protect against the totally unexpected, not a life-expectancy-type death,” says Kay Lynn Mayhue, a Certified Financial Planner with The Botsford Group in Atlanta.
Gay and lesbian couples have issues similar to their heterosexual counterparts but with a few complex twists, primarily because in most states they’re not legally able to enjoy the protections afforded to married couples.
The aims are the same: providing a safety net and income for a loved one and, increasingly, children.
But there are some other considerations, starting with the application from the insurance company.
“Married, heterosexual couples are assumed to have an insurable interest and that is the notion that you have a stake in the ongoing life of somebody. You can’t just go out and get life insurance on anybody willy-nilly,” says Joe Kapp, a financial planner with Lincoln Financial Advisors.
“For gay and lesbian couples who are not able to marry, that inherent insurable interest does not exist,” he says.
So they need to prove it through either a letter from the insurance agent or proof of financial ties.
Structuring the ownership of the insurance policy is another consideration. Married couples can leave an unlimited amount of money and assets to their surviving spouse when they die without triggering estate taxes.
Domestic partners, on the other hand, are constrained by these laws.
“The estate tax comes into play for gay couples whereas for married couples it does not. As a result, depending on how the insurance is owned, it can actually influence the estate of the person who passes away,” Kapp says.