Life insurance can be a good estate planning tool. And while I’m not an estate planner — nor do I sell life insurance — I also know that it can be something that’s not always necessary. So how do you tell who needs it? Let’s start with a few basics, beginning with what it’s not for.
What life insurance isn’t for
It’s not a way to save or invest for the future in general, or for your children’s future. It’s not a way to save for college, even though people who sell whole life policies might suggest so. (Invest instead.)
It’s not generally for kids at all, unless they’re major income earners in your family, you suspect they may be uninsurable later in life due to some hereditary disease, or you don’t have enough money at all to pay for funeral expenses if they die. No one wants to contemplate any of that, but those are pretty much the only reasons I can think of that a child might need it.
What life insurance is for
Life insurance is there to protect the folks you leave behind from financial hardship, and it can of course also be used to pay for your funeral expenses. You don’t have to take care of your loved ones forever after your death, or leave them extremely wealthy, but it is absolutely responsible to leave enough money behind so that they aren’t plunged into poverty or stressed out financially upon your death.
You can also do that, of course, by having a significant amount of money in investments — enough for the loved one(s) who are financially dependent on you to replace the income you earned with the income those investments generate. So life insurance comes into play when your investments aren’t yet at that level. Once they are, you can self-insure if you want to — just by virtue of having those investments.
Look at your situation
More than anything, taking a look at your individual situation can help you to decide whether or not you need life insurance. Ask yourself the most obvious question first: if I died today, would any of the loved ones I leave behind have financial troubles because of my death? In other words, is anyone depending on your income or the work you do on a daily basis right now?
If you have kids who not yet out on their own, that answer is probably yes. If you’re married and you and your spouse depend on your income to make the monthly budget, again, that answer is probably yes. But if you’re a single person and you’re not supporting anyone else, it’s probably a no. Those yeses or nos are usually your answer to whether or not you need life insurance.
And when it comes to deciding what type of life insurance you need, I can’t think of any reason to choose anything but term, both because it’s inexpensive and because most people don’t need it forever. (Here’s an article that goes into that in more detail.)
So if you haven’t yet considered this, now’s a good time to make doing so a part of your estate planning process. It’s simple to do, and the gift of planning ahead is a wonderful thing to do for those who are left behind if the worst happens.Posted in Estate Planning, Insurance on 06.13.12 with 18 comments.