Who Should Buy Life Insurance?

Life insurance is a type of insurance that is designed to provide financial protection for your loved ones in the event of your death. Naturally, this tends not to be one of the most favored forms of insurance as nobody likes to think about dying, so it is not uncommon for this type of policy to be skipped over.

However, as unpleasant as it may be to think about your own premature death, it is nevertheless a financial risk that you should seriously consider safeguarding against if you currently have dependents who you support with your income.

This is the whole point of having a life insurance policy, as it allows you to continue providing for the important people in your life even after you are gone. Of course, not everyone would benefit from taking out such a policy. So before we look at who does actually need life insurance, lets quickly exclude those who don’t need it.

Who Doesn’t Need Life Insurance?

In general, there are two main groups of people who do not need to buy life insurance.

The first group of people is those who are already very wealthy. As a result, they have saved enough money so that if they did die prematurely, their family would be able to live quite comfortably off those savings. Essentially, they have accumulated enough wealth and assets that they can provide their dependents with their own personal insurance policy.

The second group of people is those who do not have any dependents, and this group can be divided into two subgroups. The first subgroup is couples who each earn a high wage and do not have any children.

In the event that one member should die, the other member still has enough money to support themselves with. The second subgroup is individuals who live alone without any dependents. In such a case, their death would not cause any financial hardship for anyone.

So the bottom line is that if you don’t have anyone who is dependent on your source of income, or dependents who can afford to support to themselves, then you don’t really need to take out a life insurance policy.

Who Does Need It?

If you don’t fall into any of the above categories, then you probably should buy life insurance as you are likely to fall into one of the two groups of people listed below.

The first group of people who should buy life insurance is those who have dependents. For example, if you are married, have children and are the only source of income, then if you were to die, your family would be unable to support themselves financially. If however, you have life insurance, then your family would receive financial assistance and not have to suffer financial hardship as a result of your death.

The second group of people who would benefit from purchasing life insurance is those who would need to hire people in the event that their spouse dies. For example, if your wife looks after your children and she were to die, then you may need to hire someone to look after your children while you work. You may also need to hire someone to help you do the housework.

Alternatively, if you are providing a service for someone else, such as maintaining your parent’s house, then life insurance can be taken out to ensure that they continue receiving such services after your death. Without having such a policy, your parent’s may be forced to hire help for routine tasks which you used to do such as cutting the lawn or painting woodwork, which they may or may not be able to afford.

So the bottom line is that if you have people who are dependent on your source of income for their livelihood, and would be unable to support themselves in the event of your death, then you probably should take out a life insurance policy.

Other People Who Might Need Life Insurance

The large majority of people who require and would benefit from buying a life insurance policy fall into the two groups previously mentioned: those with dependents who rely on your personal income, and those with dependents who will need to hire assistance for daily activities after your passing.

However, there are other groups of people who would also benefit from having life insurance for specific reasons. Some of these additional groups are listed below.

Older Adults

Older adults in retirement may choose to have a permanent or term policy in order to pay for end of life expenses. Such expenses could include things like medical bills, funeral costs, burial costs, inheritance tax and estate taxes. The ultimate aim would be to absorb as much of these expenses as possible, so that their beneficiaries would receive the maximum amount of money possible.

Younger Adults

Younger adults may choose to take out a policy if they are planning on starting a family, but have not yet already done so. Taking out a term life insurance policy for example, can be built up gradually over time with very reasonable and affordable premium rates.

A 10 or 20 year policy could then be used to provide for their children’s education, or be used to cover a mortgage repayment if one parent were to die unexpectedly.

High Income Earners

Graduates who are able to enter a high paying profession may choose to start up a policy because their high income allows them to afford the additional expense. This of course, only makes sense if they have dependents they wish to support.

Single Parents

Single parents are often the only source of income that their child has, and as a result, that child’s very livelihood is dependent upon the income which they receive from their parent.

If that parent were to die prematurely, their child may be unable to support themselves financially and may then have to be taken into care. Having life insurance helps to safeguard against such events, and will give that child a much better chance of surviving in the world on their own.

Business Owners

Business owners may choose to take out life insurance in order to protect their business and any financial obligations they have related to that business. For example, a long term loan or outstanding orders/contracts.

This is especially important if your business is your sole source of income, or you one day hope to pass on your business to your children.

Health Conditions

Certain health conditions can shorten your life expectancy, and therefore, could potentially cause your dependents to be without a source of income sooner than they would otherwise be.

If you have a family history of premature death, such as due to heart attacks which have tended to occur around the same age in your family, then taking out life insurance policy is something that should be done as early as possible.

Life expectancy will also obviously depend on your current age. So you may wish to take out a policy if you are approaching old age or retirement, yet still have dependents who you support with your accumulated wealth.

How Much Do You Need To Buy?

How much life insurance you should take out can depend on many different factors. Although to give you a rough idea of how much coverage you need, you are looking at somewhere in the region of $500,000-$1 million worth of coverage. This value of course, may increase or decrease depending on your unique circumstances, some of which we will discuss shortly.

Having more coverage will provide your dependents with greater financial protection, allowing them to maintain their standard of living for longer after your passing. This does however, come at the expense of higher premiums which means that it will cost you more to maintain that policy.

The cost of your policy is obviously a very important consideration, as you are also likely to have other insurance policies that you need to maintain and pay for. Such policies could include insurance for your home, your car, your health and valuable personal possessions such as jewelry or artwork.

So whilst you certainly do want to get the highest coverage limit that you can, you also need to have money left over for other things so that your current standard of living is not adversely affected.

To help give you a better idea of exactly how much life insurance coverage you need to take out, have a look at the following six factors which can influence the amount of coverage that you are likely to need.

1) How Much Debt Do You Have?

Life insurance can be taken out to help cover any debt or financial obligations that you or your family may currently have. Some examples of debt that you might want to insure yourself for are credit card debt, a mortgage on your home or a loan on your vehicle.

Future debts may also need to be covered. So if you are planning on borrowing money sometime in the future, such as to cover your child’s college tuition fees, then these future financial obligations should also be taken into consideration.

Overall, if your dependents would be unable to cover any present or future debts by themselves, then you would most likely benefit from taking out a policy that is large enough to cover those debts. The larger your debts are, the more coverage that you are likely to need.

2) How Much Money Do You Earn?

The amount of money that you earn in your monthly paycheck will largely determine your current standard of living, and if this income were to suddenly stop, such as because of your death, the lifestyle that your family lives as a result of that income is likely to change.

You should therefore take out a policy which will allow your family to maintain the standard of living that they are currently used to for a set period of time, such as 5 or 10 years. Typically, this time will be when your children are growing up, as once they move out of home, your spouse will most likely be able to survive on a lower income.

3) How Old Are Your Children?

As any parent can testify having children is a major expense, and the more children that you have, the greater this expense becomes.

Money needs to be spent on food, clothes, toys and later on education. So having a life insurance policy with a coverage limit that is large enough to cover these expenses, is vital to ensure that your children are able to have the best possible life after you are gone.

Insuring your children’s expenses will however, vary depending on the stage of life that they are in. If they are currently in their teens for example, then you may only require a term life policy to cover your teenagers for 5-7 years during their time at college or university.

If however, you have a newly born child, then you are likely to require a longer coverage period in order to provide for them. As a result, taking out a 10 or 20 year policy would probably be needed, and this will obviously come at greater expense than a shorter policy would.

4) How Dependent Are Your Dependents?

Dependents do not only include your children, but can also include a spouse or relatives who are dependent on your income. So the greater the number of dependents that you want to support, the larger the policy limit that you will need to take out.

However, it is important to remember that people are unlikely to remain dependent on you forever. For example, your wife may be currently dependent on your income because she is staying at home and looking after the children. But when those children grow up and move out of home, she may then be able to start working again and secure her own source of income to support herself with.

The same applies to your children. Whilst they are young, they will require your financial assistance. But as soon as they are able to start working, or when they graduate from college, they will be able to start providing for themselves.

So when taking out a long term policy, bear in mind that the level of dependency of your dependants is subject to change. This in turn will influence both the length of coverage that you need to take out, and the amount of insurance that you require for that specific coverage period.

5) Your Level Of Personal Wealth

Your level of wealth is determined by how much money you have saved in the bank, your investments, your income generating assets and any assets that could potentially be sold for cash at a later date. Your assets minus your liabilities equals your true level of wealth.

The higher your level of personal wealth, the lower a policy limit that you are likely to require as your dependents will be able to support themselves with your accumulated wealth.

Of course, if you do not consider yourself to be a wealthy person, then you will probably want to take out as high a coverage limit as possible if you are the sole income earner of your family. In reality however, this may not be possible because doing so would reduce your level of disposal income. One should therefore, always prioritize essential expenses by making sure that you leave enough money to pay for food, to buy clothes with and to pay your household bills.

Remember, a life insurance policy is, for most people, something that their dependents will never benefit from as term policies only pay out a death benefit if you die within the designated term of your policy.

Chances are that you won’t die prematurely or unexpectedly, and so you should therefore focus your financial efforts on present day matters which are affecting you now. If you still have money left over after these expenses can be comfortably taken care of, only then should you consider insuring yourself against premature death.

6) Are You Insured Against Inflation?

Inflation causes the value of goods to increase each year, which in effect decreases the value of your money. As a result, any life insurance policy should take inflation into consideration for the duration of the policy’s coverage period.

This is important because without inflation coverage, what may be adequate coverage today, may in fact not provide sufficient financial coverage in the future. So be sure not to sign any policy that does not take inflation into account. Your insurance agent should be able to help you with this.

Six Factor Summary

Life insurance is another way to protect against risk, although unlike most forms of insurance, it is a selfless form of protection where you protect others from loss rather than yourself. Who you choose to protect will be the people that you care about the most, such as your children, your spouse and your parents.

As you can see from the previously mentioned life insurance factors, individuals who are likely to require a high life insurance coverage limit are those who have significant person debt obligations, many dependents, children of young age, little personal wealth and have a high standard of living.

Individuals who will need a lower life insurance coverage limit are those who have little or no personal debt, few dependents, teenagers, large amounts of personal wealth and have a low or modest standard of living.