The Need for Life Insurance
Most of us understand the need for life insurance. The primary idea being that we don't want to leave our spouse, partner, and/or child(ren) in financial jeopardy because we passed away. Traditionally, we look for insurance to cover our debts, pay for future goals, and to help meet our monthly expenses/replace lost income. Debts: The most popular reason for my clients to seek life insurance is the paying off of their debts. These include auto loans, student loans, credit cards, and the mortgage. While some clients may pay off the debts immediately, others plan to use the insurance proceeds to make their monthly payments. Depending on the type of debt, interest rate, and need for cash reserves, either choice should work. Goals: We all have different goals and different opinions on how much of those goals should be funded by life insurance. Many of my clients seem to agree that funding a cash reserve and paying for college education are important aspects of their insurance need. Retirement, on the other hand, can either be seen as shared goal or an unnecessary luxury of life insurance. This typically depends on the clients' age, work situation, and marital status. The closer clients are to retirement, the more they seem to view retirement as a shared goal that should be funded if either were to pass away. The same is true if only one spouse/partner is working. I have, however, seen that younger clients and unmarried couples feel that their spouse/partner should be able to cover their own retirement expenses. This may be due to the time horizon before retirement, the keeping of separate finances, or other beliefs of the clients. Whether or not to fund goals through life insurance proceeds is up to every client. So long as the two of you agree on your insurance objectives, it doesn't matter which option you prefer. Expense Offset/Income Replacement: Couples (especially those with children) often like to provide an expense offset or income replacement via life insurance. There is a difference between the two. Offsetting some of your expenses helps the surviving client keep a lifestyle similar to what he/she enjoyed previously. The offset helps to provide some additional funds to cover utilities, groceries, and possibly other expenses such as travel and dining out. The idea isn't to make the survivor wealthy. The added insurance allows the survivor (especially one making a lower income) to live comfortably. Couples with children often provide some sort of expense offset until the children reach college age or graduate from college. Income replacement provides for the replacement of the lost income through the time at which the two of you planned to retire. Some people opt for this because they feel that they want to fully cover the lost wages. Because this often results in a large life insurance need, few people elect to fully replace their spouse/partner's lost income. Less Traditional Needs: Unexpected costs: When most people calculate their life insurance need, they plan on providing for their survivors should they suffer an sudden death. Few realize that many people pass away from longer-term health issues. Someone with a longer-term health issue may face unplanned medical costs or absence from work. This absence from work could extend beyond sick and vacation days leaving the couple without income for an extended period of time. Because of this, the couple may be faced with dipping into savings or retirement assets to make ends meet. Due to this unexpected financial drain, the survivor may find that the life insurance purchased doesn't meet his/her actual needs. It may be prudent to factor in a little extra coverage in the event that you need to help pay for unexpected medical costs or time away from work. Pension/Social Security: Some couples may find it advantageous to buy added life insurance to replace their pension. Typically when someone retires with a pension, he/she can elect to have a beneficiary benefit provided. This benefit, however, comes with a cost. This cost reduces the current pension benefit amount and often provides a small benefit to the survivor. If the spouse/partner with a pension plan is healthy, he/she may be able to purchase a life insurance policy to provide his/her spouse/partner with a benefit matching what would have been provided through the employer's pension at a fraction of the cost. Unmarried couples do not receive a Social Security benefit when their partner passes away. Buying additional life insurance to cover this lost retirement income may be a financial necessity for those planning to use Social Security income as a primary retirement income source. Life insurance benefits can easily escalate, but that doesn't mean that survivor will be wealthy. It also doesn't mean that the insurance should come with a high price tag. There are many forms of insurance that are affordable for most households. I suggest that you review your life insurance need with your insurance agent or financial advisor. I am also available to review your life insurance needs. | 
