Life is often unpredictable and none of us can know what the future holds. While we all hope for the best, we should plan for the unexpected. Life insurance can be a valuable component of your overall financial plan, as it can serve as a financial safety net. Whether you are a young adult with plans to start a family or a retiree enjoying your financial independence, let us help you think about the big question of “Why do I need life insurance?”
Using Life Insurance for Income Replacement
Income replacement is the most common reason for purchasing life insurance. Your death could be a financial burden for your surviving family. If you are currently the primary income earner and you die prematurely, the loss of income could be devastating. A life insurance policy could help provide income for your surviving spouse, fund emergency savings, provide income for a disabled dependent, pay for college tuition, pay for childcare, or fulfill other goals.
It’s important to keep in mind where you are in life and where your career might take you. If you’re on track to begin earning a higher income, your need for life insurance coverage may increase as well. It might make sense to consider buying a higher level of coverage at a younger age when you may qualify for a cheaper rate. It is always easier to reduce the face amount of death benefit if you decide you don’t need it, than it is to increase the face amount in the future.
Estate Planning and Life Insurance
Whether you are retired or have accumulated a lot of wealth over the years, you may be thinking about life insurance for estate planning. Life insurance can help cover funeral expenses, remaining debts in your name, and estate taxes.
Traditionally, the accumulation of wealth supersedes the need for life insurance. However, if your taxable estate is sufficiently above the federal estate exemption amount, life insurance can be used to not only pay off debts but pay federal estate taxes as well as potential inheritance taxes to the state where you reside. In this case, insurance provides you confidence that your heirs will receive the assets you intended to gift them.
Life Insurance for Business Planning Needs
Life insurance can be especially useful if you own and run a business. If you are the sole owner and die unexpectedly, your family could be left with debts, lack of income, and no clear succession plan in place. Life insurance could again serve as income replacement and provide capital to pay off business debts.
If you have one or several partners in the business, life insurance can be used to fund a buyout of the shares or interest of the partner or co-owner who might die prematurely. The insurance would fund what’s called a buy/sell agreement, which provides liquidity and protects the remaining business partners from having to liquidate business assets to pay the surviving spouse.
Questions to Ask About Life Insurance
Here are a few questions you can ask to help guide your decision in whether taking out a life insurance policy is right for you:
- Do you have an emergency fund?
- Would your surviving spouse continue to work?
- Would he/she have sufficient income to keep their standard of living?
- If you have young children, how would you manage childcare if one of you dies?
- Do you have a disabled child with long term needs?
- What impact would your death have on your family’s long term financial goals?
- Will you need funds for your children’s college education?
- Do you have sufficient assets to replace the need for insurance?
- What business succession planning do you have in place?
- Are you concerned about leaving wealth behind for your children or other family members?
Life insurance can have many different uses in planning for your financial future. If you’re thinking of buying a life insurance policy but you’re unsure of how much or what type you should purchase, contact your wealth advisor or reach out to a Marshall team member. It can also be wise to review any current policies you have in place to make sure they still align with your financial goals.
