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Life Insurance

Why Do I Need Life Insurance?

The purpose of buying a life insurance policy is to ensure your loved ones are taken care of if the policy holder passes away, for living benefits, financial security, protecting your assets and more.  A lot of people neglect life insurance policies until later years. The primary issue is that there are situations where having life insurance at younger ages can be important. In addition, younger individuals have cheaper life insurance, the longer someone waits, the higher premiums will be. Today will be the youngest you will be and might be the healthiest you will be. Below are some situations where life insurance is helpful at different ages.

Parents

There is no way around it: children are expensive. According to CBS News and the Department of Agriculture, experts estimate raising a child from birth to age 17 to be $233,610 or $14,000 annually. For those of you that have been parents, you likely know the expense doesn’t necessarily end after age 17. If you were to pass away during your child’s youth, you would want them to be finically equipped to pursue this expensive endeavor called life. The life insurance payout will be needed to cover food, clothing, other necessities, as well as school and recreational costs.  In other words, buying a term life insurance policy that will last through your kids’ childhood can insure your child is financially stable in case of a tragedy.

As the child ages, the cost of raising the child decreases; however, life insurance can still be helpful through teenage years. College is expensive and the prices continue to rise. Life insurance can be used as an offset to help your child with tuition if something were to happen to the insured parent.

Funeral Expenses

No matter what age, funeral expenses are high. Headstones, services, cremation all come at a financial cost. No one wants to worry about financial costs while trying to mourn a loved one. Life insurance can be used to help offset the cost of funeral expenses. Why spend dollar for dollar on a funeral when you could spend pennies on the dollar?

Stay-at-Home Parent

A stay-at-home parent may be overlooked finically. Most stay at home parents partake in child rearing, transportation, household work and more. If the parent that took care of these obligations were to pass, the working parent may have to outsource some of the work. Outsourcing comes at a cost, one that can be reduced through life insurance.

First Time Homebuyer

Houses tend to be the most valuable asset for many individuals, and also the most expensive. If you are a first-time homeowner with a family, it is important to consider how the house will be paid for if your mortgage contribution were not available. In the case of death, life insurance can be used to help pay off any mortgage needed to keep your family in your home.

Under Covered or Over Covered Through Work

Some employees receive life insurance through their work. Many life insurance policies through work have small payouts. Thus, it is important to consider if your policy has enough coverage to offset the expenses mentioned above; childrearing, funeral costs and homeowners’ expenses. If the life insurance policy is not enough to offset these expenses, it might be smart to consider additional coverage. Any uncovered expenses falls to family and loved ones.

It may be unclear how you can be over covered through work. Higher limits mean better coverage, right? To an extent, this is true; however, anything over $50,000 of coverage through work is heavily taxed. Thus, finding the right balance of work insurance and independent insurance can help cut expenses.

Living Benefits

A common misconception is that life insurance only proceeds someone passing away. This, however, is not the case. There are three instances where life insurance can be collected before someone passes away:

  1. If an individual is terminally ill, and either diagnosed with an illness or a chronic condition that is expected to result in death within the next 24 months, the policy payment can be accelerated. In other words, if someone is likely to pass away within the next two years, the individual can receive some of the life insurance policy payout to take care of family before death.
  2. If an individual has a critical illness in every state except New York, individuals can qualify for accelerated payment of life insurance policies. Most states will include 13 to 16 different illnesses.
  3. If an individual is chronically ill, as recognized by impairment of at least two activities of daily living, an individual can accelerate benefits of life insurance. Activities of daily living include eating, bathing, dressing, toileting, and walking.  

While all of these living benefits are great perks of life insurance, they cannot be purchased once an individual is already experiencing terminal illness, critical illness, or impairment to activities of daily living. The closer to these health issues someone becomes, the higher the premium is as well.

Using Life Insurance as a Long-Term Care Plan

Life insurance can be used in addition to or as a substitute for a long-term care plan. Long term care plans ensure that you are taken care of later in life. Hybrid life insurance with linked benefits allow individuals to have around four times as much as the original investment. In other words, instead of earning smaller rates through savings, the life insurance policy can be used as a more effective investment. The common concern individuals have is if the premium is never used. If this is the case, then the death benefit doubles. If individuals change their minds, they can get 100% back.

Legacy Planning: Leaving Behind a Legacy

 Life insurance can be left to anyone. That means if an individual does not want to leave the policy payout to family, it can be left to friends, churches, charities, employers, virtually anything one can dream of. Thus, having insurance can be a great way to leave a legacy behind.

Paying Estate Taxes and last expenses

Individuals with a high net worth are heavily taxed after passing away. These taxes are called estate taxes. There are both federal and state taxes. In Colorado, there are not estate taxes; however, federal taxes remain. Having life insurance can ensure that assets left to family is not reduced considerably by tax. Instead, life insurance can be put towards taxation. Life insurance is tax free.

Life Insurance as a Tool for Estate Planning

Estate planning considers how the property is distributed, where the money will come from to pay bills after death, ways to reduce settlement costs, if there are enough assets left to support loved ones and so much more. In essence, estate planning takes into account many of the issues discussed above. Being conscientious of these issues and how they play out together, is why life insurance is often a part of estate planning.

Sources

Ap. (2017, January 9). Parents, save up: It costs this much to raise a kid. Retrieved from https://www.cbsnews.com/news/cost-of-raising-a-child-        parents-save-up/.

 

 

 

 

 

 

 

 

 

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