Few conversations are trickier than life insurance, and it isn’t hard to understand why. First off, life insurance is a financial benefit that survivors receive when a loved one dies. Conversations about death are never fun or easy. Life insurance also does not get a great reputation when it is frequently referred to in terms of being “bumped up” in suspicious situations – à la Ben Affleck’s character Nick Dunne in the 2014 hit movie Gone Girl. So, if you are feeling apprehensive or unsure about when to get life insurance, you are not alone!
Life insurance is one of the most valuable and important types of personal insurance, which is why it is so important to replace those feelings of uncertainty with a new sense of confidence in your family’s finances. Your family means everything to you. When the worst happens and you are not around to protect and provide for your loved ones, life insurance can help ensure that their needs are being met while they grieve and rebuild their lives. Put a plan in place to protect your loved ones before they are struggling to make ends meet without you.
What is Life Insurance?
There are a wide variety of scenarios in which it might make sense to include life insurance in your personal finances. Working with an experienced insurance broker who understands your career, your family and your financial goals can help ensure that you are finding and selecting the best products for your needs – but, there are several steps you can take before signing on the dotted line to make an informed decision about when to get life insurance.
Here is a brief explanation of some important life insurance terms, to help us get started:
- Formal Definition: Life insurance is a contract between an insurance company and a policyholder, in which the insurer guarantees payment of a death benefit to named beneficiaries in the event of the policyholder’s death.
- Everyday Definition: Life insurance is a protection plan that an individual purchases for a specific amount (let’s say, $300K) which would be paid to their beneficiary (most often, a spouse) after they pass away.
Using this everyday definition, it is helpful to think of life insurance as a tool that can help you accomplish financial goals for your loved ones. From funding a respectable funeral to paying off a mortgage or student loan debt, there are countless ways a life insurance policy benefit can help your family begin a new chapter. No one wants to cause additional suffering for their survivors as a result of poor financial planning.
When to Get Life Insurance on Your Timeline
It usually takes a combination of budgeting, saving, investing and spending to accomplish financial goals. Life insurance may be a useful tool for you, if it isn’t already a necessity. An insurance broker can help you assess when to get life insurance.
Certain changes or life events may also trigger your need to consider when to get life insurance. Some potentially qualifying events, include:
- Aging parents who need in-home care or assisted living
In the great circle of life, children may end up taking care of their parents as they age and encounter new health challenges. For some, this might mean going over to their parents’ house on a daily basis to take out the trash and assist with medications. For others, this might mean accommodating one or both of their parents under the same roof as their own spouse and children.A life insurance policy benefit could be used to maintain health care or living assistance for elderly parents if you were no longer around to help them. Some important considerations could be your parents’ timeline to receiving government benefits, such as Medicare or Medicaid, and how long they might need assistance until other funding kicks in. If your aging parent is mentally well, it is important to have a conversation about the what-ifs to ensure you are on the same page about how to continue their health care in a worst-case scenario.
- The birth of a child
Becoming a parent changes everything – and your finances are no exception. When you are fortunate enough to bring new life into the world, the greatest priority is to plan for and ensure their well-being. It is also a great time to start thinking about when to get life insurance.Your life insurance needs will likely be greatest when your children are young. If something unexpected were to happen to you and/or your spouse while your child is an infant or toddler, their guardian would incur more than a decade’s worth of living expenses – not including any K-12 tuition or a future college fund. This figure would be multiplied for each child in your family.As a parent, it is important to do everything in your power to protect your child. If you were no longer around to do so, life insurance could help provide for their needs into the future. Because their financial needs change as they grow older, it is also important to revisit the level of policy benefits you are carrying to make any adjustments.
- Marriage or divorce
Marriage is one of life’s most sacred commitments, and the creation of a new household most certainly has financial implications. The same is true of divorce.When you are married, your lifestyle may be based on a joint income – the home you can afford by splitting the rent or mortgage payment, and the bills that you share. If you or your spouse were suddenly and unexpectedly out of the picture, keeping up with this standard of living might be a stretch, or even impossible. A life insurance policy benefit could help provide the peace of mind that in the event of your death your spouse would not need to immediately downsize, move or dip into their savings in order to make ends meet.On the flip side, divorce may create a new financial obligation in the form of alimony or child support. For the payer, a life insurance policy could help guarantee these payments are maintained to protect your child(ren) or former spouse in your absence. For a single parent who does not receive financial support from a former spouse or partner, life insurance provides a safety net for their child(ren) in the event of losing their sole caregiver.
- Purchasing a home
Life insurance is a valuable mortgage protection tool, and certain policies, such as a Decreasing Term Life Insurance policy, are specifically designed to pay off a mortgage in the event of the policyholder’s death.The alternative, which happens all too often in everyday life, is that the surviving spouse could be forced to sell their home and downsize to a smaller residence as a result of the loss of a spouse’s income. If the market was cold, this could result in defaulting on a mortgage, lasting impacts on a credit score, and significant future financial concerns – on top of the unimaginable grief of losing a loved one suddenly and unexpectedly.
- Preparing final expenses
If you have ever seen a crowdfunding page for final (i.e., funeral) expenses, it is very often for the survivors of a loved one who failed to purchase adequate life insurance coverage, if they purchased life insurance at all.GoFundMe estimates that 13 percent of its 2017 campaigns were described as memorials, which is also one of the site’s fastest-growing categories. Aside from an individual’s debts or financial obligations, final expenses can be significant for the survivors who are left to foot the bill. According to the Funeral Consumers Alliance, the average cost of a funeral and burial is approximately $10,000.In determining when to get life insurance and the appropriate amount of coverage for you, a funeral and burial or internment should be factored in with any other financial obligations, such as a mortgage or student loans. Just because you are not paying for it now does not mean the expense will not be incurred.
- Financing a home or automobile
It is exciting to be able to afford personal possessions that enhance your quality of life, whether that be your dream home or the car you have been eyeing at the dealership for several months. For most car and homeowners, these investments are made possible by financing through a mortgage or car payment.When you are financing an investment, you may be required to have a cosigner on the loan to assume financial responsibility for the payments in case of default. This is often a spouse buy may also be a parent or other relative. If you have a mortgage or car payment (or both) you should absolutely consider life insurance among your strategies to ensure that your cosigner does not get stuck with a huge bill in your absence. Similarly, if you have cosigned on a loan, you should talk openly and honestly with the car or homeowner about their backup plan if they were unable to make payments on the asset.
- Working for an employer who does not offer life insurance (or offers a small amount)
It is becoming more and more common for employers to include company-provided life insurance in their benefits package. If you are self-employed or working for a small company, this might not be an option. For those who are insured by their employer, there are some important coverage considerations if debating when to get life insurance.First, financiers typically recommend that your life insurance coverage should be a multiple of your gross annual salary, such as seven or 10x. For example, if you were making $70,000 per year and using the 10x salary recommendation, your life insurance coverage level would be at least $700,000. If your employer does offer life insurance coverage, they might only be offering a portion of the total amount you would want to carry.Second, it is important to remember that company-provided life insurance stays with that employer. If you change jobs or face an unexpected change in employment status, your coverage would be terminated. Securing life insurance on your own is a more permanent, worry-free form of financial protection.
- Planning for retirement
As American adult life expectancy grows, so too does the number of years spent in retirement – which could be in excess of 20 years, for the healthiest of elderly adults. Along with a 401(k) or IRA, life insurance can be a valuable tool to fund a comfortable retirement.If a couple is saving for retirement on one income and that wage-earner passes away, life insurance could help ensure that the surviving spouse’s retirement savings stay on track. If one spouse passes away during retirement, taking away a source of Social Security benefits, life insurance can help the surviving spouse maintain their quality of life on a fixed income. An added bonus: The cash value of a life insurance policy can be drawn out tax-free.
- Paying down debt (student loans or otherwise)
One note about debt – specifically, student loan debt. Millions of Americans are burdened with this type of financing, and if you are one of them, you may be wondering what would happen to that bill if something happened to you.The debt obligation of student loans largely depends on the type of loan you have, whether federal, private or Parent PLUS. A financial advisor can help you determine whether or not your student loans are eligible for a death discharge, which would release your debt from being passed down to survivors. If the repayment obligation falls on a spouse or cosigner, then life insurance could help provide peace of mind for all responsible parties.
- A single income household with a stay-at-home parent
Many people associate the need for life insurance with an income-producing parent. Yet, stay-at-home parents provide so many invaluable contributions to their family in lieu of a traditional wage. In calculating when to get life insurance and your needs, you should absolutely calculate a coverage amount for this family member, whose household services such as cooking and child care would need to be outsourced in the event of that family member’s death.For families with dependent children, it is almost always a best practice for both parents to be insured. In the event of losing a stay-at-home parent, a life insurance policy benefit could help provide for a nanny, chauffeur, tutor or after-school daycare to help the surviving spouse adjust to their new load of responsibilities.
Getting Started with Life Insurance
The question of when to get life insurance and how to get started is not something you should have to tackle on your own. Our team of experienced insurance brokers has years of industry knowledge and insurance expertise to help you make an informed decision about the best life insurance strategy for you and your loved ones. As an independent broker, we are able to write life insurance policies with industry-leading carriers at competitive prices.