We’ve all likely heard of life insurance, but seldom know who benefits from it the most. The term “life insurance” is one that probably exists in the back of your mind at all times as you contemplate whether or not you need it. So, who needs a life insurance policy and why?
What Does Life Insurance Cover?
If you are considering life insurance, then you are probably wondering what exactly it will cover should you die unexpectedly. After all, those monthly premiums must be going somewhere, right? In simple terms, life insurance will cover nearly every expense of your funeral as well as keep your family comfortable until they figure out their next steps.
To imagine the positive impact of life insurance more clearly, let’s look at how a life insurance pay out would benefit the most important people in your life:
- When you pass, the person who inherits your debt will have the money they need to pay it off.
- Your partner who relies on your income will have the money they need to pay the bills.
- Your children will have everything they need should you die unexpectedly.
- Your children can go to college.
- Your heirs will have the money they need to pay estate taxes on your property.
- Your funeral will be paid for.
- Your business can continue to thrive and your employees will not be left without pay.
Do You Really Need Life Insurance?
If you’re considering life insurance, odds are you are thinking about the future of those around you should the unthinkable happen to you. Likely, you are one of the main monetary contributors of your family, and if you were to perish unexpectedly, your family would be at a major loss.
When you are making the decision about whether to invest in a life insurance policy, you should ask yourself one vital question:
Would your death have a substantial financial impact on those you care about?
If you can answer yes to this question in any way, you should seriously consider life insurance. Basically, if you are 24 and have only your goldfish to support you, probably don’t need life insurance. But if you are 26 and have a wife and two toddlers, you should consider life insurance.
While there are many different types of life insurance policies, all of them would cover your loved ones in some capacity if you died.
Generally, the payout can be used for housing, debt, food, bills, and any other item required for daily living. With a life insurance policy, you can rest easy knowing the ones you care about will be able to pay their bills while they figure out their next steps.
Who Needs Life Insurance the Most?
If you have a considerable amount of debt, whether it’s student debt, a mortgage, or any other personal debt, you should consider life insurance. When you pass, that debt will be transferred to either your partner or your heirs. So, if you were to pass, not only would they have to grieve your death, but they will also become burdened with thousands of dollars in debt.
While we did mention this above, we want to say it again to really hone it in: those who have a family or partner to support are the best candidates for life insurance. Instead of leaving your family to grieve and pay the expenses of your funeral should you pass, invest in a life insurance policy to give everyone peace of mind.
Who Doesn’t Need Life Insurance?
While those who have a family or partner to support are the best candidates for life insurance, those who do not have anyone relying on them for income may not need to invest in life insurance.
If you fall into this category, you would be better off investing your money in other assets, such as stocks, real estate, or a retirement fund. That way, you can continue to save money as you work towards retirement.
However, you should keep in mind that the younger and healthier you are when you sign up for a life insurance policy, the lower your monthly premium for life insurance will be. So, if you plan on proposing to the girl of your dreams or will be starting a family in the near future, you should be looking into getting a life insurance policy.
Do I Need Life Insurance if I Have a Lot of Savings?
People get life insurance for different reasons. While some like the peace of mind knowing that their family will be covered if something happens to you, others just don’t have the funds to support their family long term. If you do have a significant amount of savings, you may have more options than those who don’t.
But – yes, there is a but — the definition of “a lot of savings” will vary from person to person. If you consider a lot of savings to be $50,000, how far will that get your family? Will it still send your children to college? Will your family be able to support themselves for more than a year?
How about $100,000 in savings, or $500,000? Will this sum support their lifestyles? But for how long?
Honestly, it depends on how your family lives and how long you want to support them in their “normal” lifestyles. If you leave your family inheritance, that money will also be taxed (so keep that in mind as well).
If you feel that your savings will cover your family’s lifestyle, then you might not need a life insurance policy. But, if you are putting that much money away each month, why not pay the premium for a life insurance policy to give your family an extra sum of cash? Even if you do have savings, you should still consider life insurance.
Do I Need Life Insurance if I Have a 401k?
A 401K is commonly referred to as one of the best ways to save for retirement because money is automatically deducted from your paycheck to be put into a savings account. Not only that but oftentimes your employer will match the amount you put in AND the money will grow over time. Plus, you can expect these benefits:
- Possible free money from your employer.
- You’ll pay less on your taxes because the money you put into a 401K is initially untaxable.
- You’ll get tax benefits because you can’t touch that money until you retire.
Seems like the very best way to save, right? Well, it might not be. In fact, you will have much more freedom and certainty that your family will be covered if you die by investing in a life insurance policy.
Whether you need a life insurance plan if you already have a 401K holds the same argument of whether your family relies on you for the finances. If you have a family or partner that relies on you, regardless of a 401K, you should be looking into life insurance.
However, there are some unique benefits to having what’s called a life insurance retirement plan (LIRP) because your family will have absolute financial security if you were to die young. For the complete review of whether you should invest in life insurance or a 401K, hold on until the next section.
Is it Better to Invest in Life Insurance or 401k?
While a 401K is not a bad place to invest your money, it does have its drawbacks. For example, your 401K depends on how well the stock market is doing. If the stock market is doing great and growing steadily, then your 401K will grow with it. But if the market crashes… well, you still have that money you hid under your mattress, right?
If you invest your money into a life insurance retirement plan (LIRP), your money will not be harmed by the unpredictable swings of the market. Instead, you’ll have complete certainty that your return rate will remain steady throughout the duration of your policy.
Even though the growth rate of a life insurance policy is at about 4 to 6 percent and a 401K follows the normal trends of 7 to 8 percent, there is a lot less risk associated with a LIRP.
Unlike a 401K that will be taxed at a rate that you won’t know until you cash it out, your life insurance policy will be taxed upfront like your regular income. Additionally, the money in your LIRP will grow at a steady rate and be paid dividends tax-free. When you take your money out, it’s not taxed. So really, you have much more control over a LIRP.
Further, you can’t access a 401K until you are at least 59.5 years old. If your family experiences an emergency and you need to dip into your funds, you’ll be charged a penalty of 10% as well as the taxes that will be owed to the IRS. But with a LIRP, you can access the money easily by taking out a loan from your life insurance policy. There are no extra fees or penalties, all you have to do is pay back the loan.
Which is better to invest in? That answer is up to you. However, the benefits of a LIRP do seem rather appealing.
Can I Use 401k to Buy Life Insurance?
If your company allows it, you can use your 401K to purchase life insurance. Whether you can purchase group life insurance or individual life insurance will depend on your employer’s policy. The best way to find out if this is an option for you is to talk to your human resources department.
How Much Life Insurance Coverage Do You Need?
There are generally two types of life insurance: term life insurance and permanent life insurance.
- Term life insurance is exactly what it sounds like, it’s a temporary life insurance policy that will expire in a specified number of years. Generally, term life insurance is the most affordable and flexible, so most people at least start with this option. The benefit of term life insurance is that you can reevaluate your plan once it expires because odds are, your life changed significantly since you began your first policy.
- The second type of life insurance is permanent life insurance, which covers the policyholder for his or her entire life. While not everyone will go for this type of life insurance policy, it does have many benefits. For example, life insurance is not taxable, so it is a great way to transfer your wealth to the next generation of your family.
But really, how much life insurance coverage do you need?
There are options for online life insurance calculators to do this math for you, but if you’re trying to figure out just how much you need, you can follow this general rule of thumb:
- Multiply your income by 10 (if you have no children and are only supporting your spouse).
- Get 10 times your income and add $100,000 per child for a healthy college fund.
- Add up the total number of debts you have accrued (personal debt, mortgage, education, etc.).
- Subtract your total savings.
- Find your total.
When it comes to calculating the total amount of life insurance you need, don’t cut corners. Should you pass unexpectedly, it would be better to have more funds than your family needs than not enough.
When it comes to life insurance, it’s always a good idea to consider it as an option. If you are the main financial supporter of your family, it’s better to be safe than sorry when it comes to the wellbeing of those you love.
* This content is not provided by the financial institution or the offer’s provider. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and does not constitute a financial or expert advice.