Who Needs Life Insurance?

Those with Dependent Children

The main reason by far why people buy life insurance policies is to provide financial security to their dependents in the event of their death. This generally means one’s dependent children, but it can also involve dependent spouses or other family members who rely on one’s income to subside or to maintain their lifestyle.

Who Needs Life Insurance?When we have children, we generally do so with an expectation that we will be able to provide for them during their formative years through using part of our income to do so. During the earlier years in our lives, the ones that we tend to have children, we often do not have much in savings and rarely have enough to be able to provide for our children well enough should we die and our family loses our income stream.

Raising children is a fairly expensive affair as it requires us to need to devote a substantial sum over a couple of decades. There are many who look to do this on a budget and only provide for them minimally, and of course some fall beneath what most would call a reasonable threshold, but there will be some sort of minimum standard that we wish to use for our own children and this is what we should be looking to strive for, both in life and should we die during this period.

How much it costs to raise a child per year differs somewhat, with some believing that $5,000 a year is enough, and others using numbers like $12,000 or more, and there are certainly different levels that we may provide our children here. We need to look what we are actually spending on them though and use that as a starting point and not rely on someone else’s idea of what we should spend if we are to be practical about this.

If only one parent dies in a two parent family, the surviving parent often will be able to contribute their normal share to this, where we’re now only looking to replace part of these costs over the years, with the portion needing to be replaced depending on how much the insured is contributing, or more accurately, the shortfall once we look at what the other parent could reasonably contribute if the other dies while children are dependent upon them.

In a single parent family, often all of this would need to be replaced, although we’re also going to need a contingent arrangement in place as well, for instance having the children cared for by other family members. This arrangement would generally take into account the family members providing for the children at least somewhat, with the insurance benefit providing a supplement to that to top things off to the standard of care we are seeking.

Anyone with children therefore needs to examine their life insurance needs in light of what they would need to provide for them should they die at a time that their children are relying on them to some degree for financial support.

Those with a Dependent Spouse

If your spouse relies entirely on you for financial support, and you die, this can present a risk that needs to be addressed. Like your children, anyone who relies upon your income substantially should at least be accounted for, where we need to ask ourselves what their situation may be if we die.

A spouse may be currently entirely dependent upon your income but do so by choice, or even by lack of need, in a case for instance where their spouse makes enough income that they do not need to earn themselves.

When we look at the picture if we die, we need to account not for the income that is lost but what potential the spouse may have to generate income on their own in that event, which may be sufficient and have us not really needing life insurance for this purpose, although we still may want to.

Depending on the circumstances, there may not only be a significant shortfall but this may be multiplied over a long period of time, as long as 50 years in some cases. We may not even be able to provide for our spouse for this length of time as this may involve buying a policy that we cannot afford, and we need to be careful with putting ourselves in financial hardship now to look to avoid the risk of that happening later.

In addition to looking to cover shortfalls with raising our children sufficiently well if we die, we also need to consider any shortfalls that may result with our spouse as well, especially since our spouse may not be able to manage things themselves at any point during their lives, as opposed to our children where we generally assume that they will be able to do so once they reach adulthood and especially after their education is completed.

How well a surviving spouse may be expected to do on their own is a relative matter though, and depends on what sort of quality of lifestyle we are looking to protect. While we may expect sacrifices to be made after the death of a spouse, it then becomes a matter of what extent is seen as acceptable and then see if we can protect against falling beneath this level.

It may be that we decide that we’re going to have to take on more risk than we may wish to and require greater sacrifices should we die than we’d want to make, because life insurance costs money and there are certainly competing objectives here, and even ones that are seeking the same purpose.

Saving for retirement for instance seeks to provide financial security over our lives, and if we have a spouse then it does so to provide for both people. We don’t want to forget about our need to save as well, and money that we spend on life insurance will take away from this. We therefore need to strike the right balance between things being taken care of if we die and things being taken care of if we do not.

In our later years, the need for life insurance generally wanes, and at the point where we are living off our savings and pensions it tends to be needed far less. There may still be a need at this point, especially for buying insurance to take care of our final expenses, but the need to protect spouses with life insurance is generally the greatest in our younger years and goes down over time, especially if we are accumulating wealth as we age.

Those Who Own a Home or Are in a Business Partnership

Only a small percentage of people own their home free and clear, and therefore have a mortgage which tends to require a substantial portion of our income to maintain the payments on. People don’t generally shoot too low with home ownership and most often strive to live in one that takes their ability to repay pretty close to their means.

If we live alone, this is not something we will tend to worry about too much, although we often will have plans to give the home to someone in our family should we die. In order to preserve this, we may take on a separate life insurance policy which will pay off the mortgage in the event of our death.

If we are already at a certain age or have a predetermined condition, both which make the risk of our death higher, we may not be able to get this coverage at all, and if we can, the premiums may be too expensive to make this practical. Insurance companies are in the business of taking on risk but they are not in the business of taking on too much, and the idea behind policies is to make money, not just benefit people, although people do benefit from insurance.

The deal has to be a good one for both parties, the insurer and the insured, and insurers don’t want to take on excessive risks either, or offer policies that they expect to lose money with on balance. We benefit from being protected against risk and they benefit from the equations coming out in their favor overall.

Like all life insurance, mortgage insurance works best when we don’t expect to die but still want to protect against it.

Should we qualify for mortgage insurance, meaning that the likelihood of our dying during the mortgage isn’t excessively high for the risk appetite of insurers, if there are two or more parties on the mortgage and one dies, this will very often be a significant hardship for the surviving mortgagees and without this coverage they may end up defaulting on the mortgage.

Even though the chances of this happening may be slight, so is the chance of your house burning down, but we almost always buy fire insurance, and we also should consider mortgage life insurance to protect us from losing our homes due to the death of one of the parties.

The same principle applies to those in business together, and this is why it is common for those in a partnership to have life insurance policies taken out on each other. If one of the partners dies, this can potentially spell the end of the business. The goal isn’t to cash in on such an event, it is to allow the business to survive in such an event, where the financial contributions of a deceased partner or principal in a business can be replaced enough by a policy.

The key to deciding whether we need a life insurance policy is to ask ourselves what the financial repercussions of our death may be, and then seek to use a life insurance policy to help make up for what will be lost, to use it as a restorative measure to keep things reasonably stable at a level we deem to be required or choose.

This can involve taking care of our dependent children or spouse, or other family members, protecting our home ownership, ensuring that businesses which we are involved in will be able to go on, or even protecting those that we wish to leave assets to if we die by preserving our wealth and estate.

This involves a lot of people needing to consider some form and some degree of life insurance protection. It does not mean that everyone needs life insurance, like a life insurance sales person may wish us to believe, but they still can confidently just knock on doors and expect the potential for a sale to be fairly high because most people can benefit from some sort of coverage.

The insurance industry believes that we do not have enough life insurance generally and very often this is the case. We need to carefully examine our needs here if we’re looking to achieve at least a minimally acceptable level of protection. It is we that decide what is acceptable but we cannot do so unless we devote the proper thought to this.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: ken@marketreview.com

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