Do You Really Need Life Insurance?

Suzanna De Baca -- Expert Business Source, 7/25/2008 8:42:00 AM

Time and time again, people ask me if life insurance is really worth the cost. The premiums seem high and life insurance salesman seem so pushy, they say. Wealthy individuals often assert that they don’t need it, and those on budgets often balk at paying for it.

I’ve met relatively few people who like to pay for life insurance, but I stress that in most cases it is a critical part of a healthy financial plan. There are numerous reasons that you should seriously consider getting as much life insurance as you can afford, rather than trying to cut corners.

Income Replacement
Life insurance allows you to protect your family financially in the event of your death. Even if you have means, many individuals do not realize how much it costs to replace the income of a major breadwinner for an extended period of time. In addition to losing wages, your family will also lose the retirement savings contributions you would have made. Life insurance can be a cost effective way to provide your family with income that replaces what you would have contributed through your earnings.

“Labor” Replacement
Your spouse may not give you credit for it, but you probably do quite a few things in and around the house. Whether you contribute to the household through providing childcare, mowing and maintaining the lawn, doing home repairs, cooking, or chauffering kids around, these are all tasks that would have to be replaced if something happened to you. Your family would not only have reduced income, but might also have increased expenses. In this regard, women are often especially underinsured.

Debt or Mortgage Payoff
If you are not available to help your family pay off your house mortgage or other debts, these expenses can become burdensome and even overwhelming. Life insurance can be applied to pay down or pay off a mortgage, credit card debt, or other types of debt. Many homeowners purchase at least enough life insurance to cover their mortgage, but others see that as just one component of what the family might need.

Emergency Fund
In addition to paying off debts, life insurance can provide income to cushion the family through emergencies. Emergencies may include health expenses, layoffs, or even time for the surviving spouse to find a job. 

Final Expenses
Having funds to pay for “final expenses” (often a euphemism for “funeral”) is a no-brainer. However, a funeral may only be a part of the true final expenses. Large medical bills, nursing home or in-home care, or legal expenses can add up and life insurance can cover some of these unexpected bills.

Many single people wonder if they need life insurance since they don’t have to replace income for their families. If they do not have resources, however, someone – maybe their parents or siblings – may end up paying for final or funeral costs. If you’re single, make sure you can cover your mortgage, debts, and final expenses so your relatives don’t have to.

Children's Education.
If you have children and are saving for their college education, those savings might be cut off in the event of your death. Depending on how much you buy, life insurance can create a nest egg or cover the entire cost of your children’s education.

Estate Planning
Affluent individuals often comment that they don’t need life insurance to pay for any of the above mentioned expenses. However, permanent life insurance is often successfully used as an estate planning tool, providing liquidity if the estate is in excess of the current Federal Estate Tax exemption. Consult with your tax or estate attorney or financial advisor to see if this might be a cost-effective way to deal with estate issues.

Charitable Giving
Life insurance doesn’t have to go to your family. If you’re charitably minded, you can always use permanent life insurance to leverage your philanthropic goals. By paying in premium over time, you may be able to leave more to charities or organizations that you love than if you made an outright gift. In addition, you may be able to leave money both to your family and to those organizations that mean so much to you.

Life insurance has many uses. 
Life insurance is an important part of your overall financial picture. Some of its uses are critical for income replacement and paying expenses, and others can be handy ways to make the most of your dollars. There are countless reputable life insurance agents out there, so if you have a pushy salesperson, look elsewhere. Don’t let that person prevent you from getting the coverage you need or from which you can benefit.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.