The Importance of Life Insurance
While we are in the process of accumulating enough assets for us to get by on throughout our lives as well as any additional funds that we plan on leaving behind should be live to a ripe old age and require the use of a lot of these funds, there may be a gap left between what we have at a given point in time and what we need should we die prematurely or unexpectedly.
The idea behind life insurance is to look to close the gap, or at least narrow it, between what you could leave your loved ones now and what they would need if you did pass. While there are practical considerations here, and you may not be able to afford enough insurance to protect your family enough without unduly impacting their quality of life now, we at least should be looking to strike a balance between the two.
What life insurance does is not to necessarily provide a lump sum for your family to live on but to instead protect your income during your working years. It should also be used to not protect against our dying per se but to make up for money that we would be making if we do die and would continue to work for a number of years instead should we not have died prematurely.
Once we get up in age, life insurance no longer becomes economically efficient, and actually ends up becoming prohibitively expensive if there is a good chance that we will indeed die. Life insurance really works though if the chances of our dying is low and we still need to cover the financial risk to our family if it did happen.
Some people fall for the idea of permanent insurance where they contribute a lot of money in the earlier and mid years of their lives in order to be able to afford the huge cost of life insurance in our later years, but this is a mistake and we’d be better off just saving the extra money we pay for this.
Having enough life insurance not only benefits our loved ones should we die too young, it also provides us peace of mind while we’re still here. There is enough to worry about in life, especially financial worries, and if we can eliminate this one our lives are bound to be richer.
Peace of mind is actually one of the main benefits of all types of insurance, because if we don’t have enough of a certain kind, this will generally cause us stress, and undermine the satisfaction that we get out of life in some way.
Life insurance costs money of course and we do want to make sure that we do get enough value out of it, but most people approach this too conservatively and the tendency for people is to not have near enough. At least some of this shortfall is due to not having enough financial resources to be able to select the right amount of life insurance, but at least some of this is not taking this serious enough and not committing the amount of our earnings to this important matter as we should.
Not everyone needs life insurance of course, and we do need to examine what the needs of our dependents will actually be, and only look to cover what is actually needed here, which generally is the ability for our dependents to continue to enjoy at least a similar lifestyle as they did while we are here.
Other Considerations Related to our Death or Incapacity
We need to worry about more than just our death when it comes to distributing our assets, and we may find ourselves in a position where we cannot manage our own affairs and therefore must entrust someone to do it for us, through a power of attorney.
We need to be careful in selecting who we appoint with this power, as they will decide how to spend our money when we cannot or are deemed to not have enough capacity to do so. These situations come up particularly often in our final years, especially if we suffer from an illness such as dementia or other conditions which may impact our cognitive function.
How our financial affairs are managed will also affect what we end up with when we do go, and this is definitely something that we should put a lot of thought into when we get a lawyer to draw up these documents. Even more so than a will, powers of attorney are things that do require legal expertise, especially to set limits on the powers we wish to convey.
There are some who choose to take a more informal approach to this, where they may provide joint access to those who they are seeking this help from. This is much more subject to potential abuse than a power of attorney document though and much care should be used here, since we are basically turning over ownership of these assets to those we enjoin with.
Joint property also comes with rights of survivorship, and if one of the parties dies, the other automatically gains full ownership of the assets involved. This can be a good way to bequeath at least some of our assets because this escapes the need for probate and taxes and also the risk of our wishes being contested by others, at least if we were not coerced into doing this and have the capacity to do so at the time of enjoining.
We may also choose to give away some of our wealth while we are still here, within the restraints imposed by tax code. The idea here isn’t just to allow our loved ones to enjoy surplus amounts without having to wait until we die to do so, but also to be part of a strategy to limit the amount of tax that will be paid on what we give away.
We may also want to set up a trust to allow for money to be given to our loved ones with conditions that we impose, conditions that would better ensure that our money will be spent in a way that we wish it to be. The main concern here is that if we give lump sums to people that may not spend it as responsibly as they should, and this is especially a concern with surviving children.
Unless our estate is large though, we generally don’t need separate trusts as these conditions can generally be written into our wills, and trusts are relatively expensive to administer, so they should only really be used if they are needed. Sometimes they are though, and sometimes nothing else will really do, if the amount we are leaving someone is a large one that really needs to be distributed over a longer period of time.
Once we have our plan in place, we must be diligent to update it whenever needed, whenever there is a large enough material change in our circumstances to benefit from such an update. Many people are too lax about this and should the worst happen, we don’t want to allow this lack of attention to undo our plans any more than can be avoided.
We spend our lifetimes accumulating wealth, and while our goal may just be to provide for ourselves and leave little or nothing behind, if what happens after we’re gone matters to us, we need to make sure we put the same effort into preparing for this event as we do with the other financial matters in our lives, if not more.