How Do You Know If You Need Life Insurance, and If So, How Much?
September is Life Insurance Awareness Month. I know what you are thinking, that this is just another month to bring awareness to a cause of the day. Just like the other months when we observe different topics: National Yoga Month, National Pizza Month, or National Heart Health Month. But Life Insurance Awareness Month is important. It seems that it’s something we all need yet hate to talk about it.
Life Insurance: A Brief History
The concept of life insurance, where one party promises to pay another party in case the covered person dies, has been around since the Roman Empire, if not before. The first example of this was traced back to Roman “burial clubs” that covered the cost of entombment in 96 A.D. The first known life policy was signed in London back in June 1583. Today, we insure everything from our businesses, electronics, and hopefully, our loved ones. It was first brought to our shores in the late 1760s in New York, and really started taking shape when Navy Mutual was inspired 100 years later by the surviving widows and orphans left stranded after the Battle of the Little Bighorn, and of the families of U.S. sailors who died at sea.
Knowing that people have been discussing the need for life insurance for hundreds of years, we all have coverage, right? No. More than half of the country either does not have insurance or is uninsured. One in three families remain without enough coverage.
When you work with financial professionals like us at Sachs Financial, we will walk you through a four-part analysis to determine how much life coverage you need.
Reasons to Have Life Insurance
Below are some reasons why you should have life insurance. The amount of your coverage depends on your personal situation and needs. Once you know why you need coverage, we will help you decide how much coverage you need to accomplish your goals.
1. It’s Not for You, It’s for Them.
Maybe the most important parts of life insurance are to understand that it’s not for you, it’s for your loved ones. I know we are all going to live forever, but what happens to your family if you pass away tomorrow? Does your family need money to replace your income, cover daily expenses (groceries, utilities, car payments), or be able to take time off to grieve? According to LIMRA, one in four people would have negative financial effects within a month of the primary wage earner passing.
The quicker they can receive the funds, the better. Settling an estate can take months and sometimes goes through probate. If your spouse lost a paycheck, it would be nice to have something quickly. Typically, life insurance pays out much quicker in providing the support your family needs.
2. Saving Your Family Home
For many people, a home is the most important financial investment they have. It’s where your kids grew up, where you spent time making it yours. Your home is important, and it can be the largest family expense. The US Census Bureau shows the median mortgage payment is about $1,100 a month. Without your help and support, that is a large expense to cover. Term Life Insurance can cover the mortgage if you pass suddenly. You can match the length of your mortgage with the term of your life insurance. In addition, by covering other large debts you have, from cars to student loans, you can help make sure your passing does not financially crush your family.
The quicker they can receive the funds, the better. Settling an estate can take months and sometimes goes through probate. If your spouse lost a paycheck, it would be nice to have something quickly. Typically, life insurance pays out much quicker in providing the support your family needs.
3. Pay Off Student Loans and Debt
More and more people are choosing to go to college, and the cost has continued to outpace standard measures like inflation. In short, it is getting more expensive. Last fall, USNews.com published a story that shows the cost of higher education. In 2021, the annual cost of tuition (not including room and board) averaged between $27,000 to $41,000. Some state schools give a reduced rate to students that are residents of that state. But these are just averages. In reality, they are much higher. To protect your family and your kids’ education, it’s highly recommended to have a plan to pay for it.
The quicker they can receive the funds, the better. Settling an estate can take months and sometimes goes through probate. If your spouse lost a paycheck, it would be nice to have something quickly. Typically, life insurance pays out much quicker in providing the support your family needs.
4. Add Safety to Your Retirement
The goal is to retire. You will spend 80-90,000 hours working and saving your money, adding to your 401(k) and IRAs, and building your nest egg to feel comfortable about retirement. If you can see the date, knowing you’re within the goal line of reaching retirement, life insurance can help make sure that your partner gets to enjoy the life you dreamed of together. In 2021, 30% of people bought life insurance to supplement retirement, according to LIMRA.
Recent tax changes regarding the inheritance of your retirement accounts—those are your Traditional IRA and Roth IRA—have increased the need to look at life insurance as part of your plan. Other than your spouse, anyone that inherits your accounts must pay the taxes over the “10-Year Rule.” Gone are the stretch, inherited, or beneficial options. IRA accounts must be removed from your name within the 10-year window. Having a life policy to cover those taxes will help your kids and grandkids keep more of the money you leave.
5. Cash During Your Lifetime
Not solely for your loved ones, some life insurance features can provide help during your own lifetime. Whole Life Insurance or Permanent Life Insurance are policies that last as long as you do, require more premiums, and build cash value over time. It allows you to loan money to yourself tax free, or simply withdraw some of that cash value. There are no restrictions on how you use these funds. Use the money as you want, to pay for a vacation, wedding, new car, or trip with the kids and grandchildren.
If your life takes an unexpected turn and you are diagnosed with a terminal illness, you can use the accelerated benefit rider. This will pay benefits to you, while you’re alive and dealing with unplanned expenses taking the burden off your family.
The Original Benefit: Legacy
There are so many other reasons to have life insurance as part of your retirement plan. However, the original reason is sometimes the best. Do you want to create a legacy and leave something behind to help your family members reach their own financial goals? From a single life policy to a survivorship policy, life insurance is one of the best and most affordable ways to make that happen.
If you’re not sure how much you need or what your family could use it for, start by calculating a coverage amount with our life insurance calculator.
