Life insurance is one of those topics that nobody really likes to talk about because, well, who likes to talk about dying? It’s also one that gets a bad rap because of the poor behavior of a large number of salesmen who push it. The lack of conversation is unfortunate, as life insurance is one of the foundational pieces of a secure financial lifestyle.
In order to clear up some of the confusion around life insurance, I’m starting a four-part series that will explain its importance and guide you through the process of purchasing a policy that’s right for you and your family. You can follow along with the entire series here:
-Part 1: How to know when you need life insurance
-Part 2: How much life insurance do you need?
-Part 3: How to choose the right type of life insurance
-Part 4: A step-by-step guide through the process of actually buying life insurance
Today we’ll talk about the types of people who have a need for life insurance, as well as those who don’t. By the end of this post you should have a good idea of whether it’s right for you.
What is the purpose of life insurance?
Back when we talked about the purpose of creating a financial plan, building financial security for our families was one of the primary objectives. Life insurance is one of the building blocks of that security.
Life insurance allows us to ensure that the people who depend on us financially will be taken care of if we die.
As a young parent, this is the primary, and likely only, purpose of life insurance. If you ever talk to an insurance salesman, they will likely try to convince you that life insurance can also be a great investment. Don’t believe them. You can read my in-depth analysis of why life insurance is a poor investment if you’d like more detail on the topic, but for our purposes here I’ll keep it simple and just say that you should ignore that aspect of it.
The primary reason you as a parent should be thinking about life insurance is to make sure that no matter what your family would have the financial resources to handle their basic needs.
Who needs life insurance?
So if the primary purpose of life insurance is to protect your family, it makes sense to start looking into life insurance as soon as you know that you’re starting a family. If you already have children and you don’t have life insurance, now is the time to start considering it.
It’s pretty clear that a working parent should have some level of life insurance coverage. If that parent were to die, the primary purpose of the insurance would be to replace his or her income. It will likely take at least a few years to fully adjust to life without that income, and in some cases it might be much longer. In any case, using insurance proceeds to replace that income for at least some period of time will go a long way towards providing the financial security your family needs.
What may not be as clear is that stay-at-home parents likely need a good amount of life insurance as well. If you are a stay-at-home parent and you died, who would take care of your children? Unless your spouse quit his or her job, which would bring about its own set of financial needs, your children would likely require at least some level of daycare. This could be accomplished in any number of ways, but especially with younger children could be very expensive. This need alone often requires life insurance on the stay-at-home parent.
According to Salary.com, the average stay-at-home mom is worth $113,568 per year. That’s worth keeping in mind when evaluating your own situation and the need for life insurance on a stay-at-home parent.
The other type of person who should consider life insurance is a married person with debts that their assets couldn’t cover. As an example, a married couple might be able to afford a mortgage when both are contributing towards the payments, but it might be a strain if just one was left to do it alone. In that case, some amount of life insurance might make sense to either pay off the mortgage or help with the payments.
Who doesn’t need life insurance?
If there isn’t anyone who depends on you financially, then you likely don’t have a need for life insurance. This includes most people who don’t have children (noting the exception above of married couples with debt). It also includes parents whose children are grown and are no longer financially dependent upon them.
If you have enough savings outside of retirement accounts that could care for your family for years if you died, then you don’t need life insurance. This is going to be a very small percentage of the population, especially among new parents.
Once you’ve identified the need for life insurance, the next step is to determine how much you need. I’ll address this question with a comprehensive step-by-step guide in next week’s post.
Photo courtesy of AndyBennettPhotographer.co.uk