If youâ€™re like most people, you probably think you donâ€™t need life insurance until you provide for a family of your own. Even then, life insurance may not be on your radar when it comes to financial planning. According to the 2018 Insurance Barometer Study from Life Happens and the Life Insurance and Market Research Association (LIMRA), adultsâ€”especially millennialsâ€”tend to overestimate the cost of life insurance and therefore donâ€™t prioritize it among their other financial obligations.
Like other types of insurance, choosing the right life insurance policy and amount of coverage is critical to avoid overpaying in premiums. Before researching or purchasing a policy for yourself, itâ€™s important to know what you want to accomplish with it. If youâ€™re unfamiliar with the various ways life insurance can be used as a financial planning tool, the following four scenarios may help you decide whether you and those important to you can benefit from holding a policy.
1.Â Â Â Youâ€™ve Just Started a Family
Though not the only reason you might need life insurance, providing for your family in the event of your untimely death is one of the primary reasons people tend to purchase it. Life insurance can be used to replace the income that your family depends on to meet daily living expenses, such as mortgage or car payments. If you have young children, it can also be used to provide for their educational expenses, which can be quite costly.
2.Â Â Â Youâ€™re Part of a Blended Family
Family dynamics are often complicated, especially if your family isnâ€™t considered â€śtraditional.â€ť If youâ€™re remarried, you might consider life insurance to provide for your new spouse while allowing your children to inherit other assets. Or, if you have children from multiple marriages, you can use life insurance to ensure that all of your children are provided for equally when you die. Regardless of your family situation, life insurance can be an effective way to allow for wealth transfer equalization among different family members.
3.Â Â Â Youâ€™re Likely to Have Estate Tax Liabilities
Depending on its size, your estate may owe federalâ€”and in some cases, stateâ€”taxes when itâ€™s transferred to your heirs. Many people purchase life insurance policies to fund this liability. Alternatively, life insurance can be used to create a reserve of liquidity that can be accessed to pay various expenses and potential taxes upon your death, especially if most of the assets youâ€™re transferring are difficult to convert to cash quickly, like property and other valuables.
4.Â Â Â You Own a Business
Finally, if you own a business, life insurance can be used in several ways to provide for the ongoing survival of the company. From a succession planning perspective, life insurance can be used to fund purchase or sale arrangements, or it can provide an inheritance to your heirs who wonâ€™t receive a share of the family business when you hand over the reins. From a personnel perspective, key person insurance is often purchased to replace income needed by the business due to the untimely death of one of the primary revenue generators. Life insurance can also be offered as part of your overall benefits package to attract and retain talented employees.
Your life insurance needs can change over the course of your life as your financial circumstances and family dynamics evolve, so itâ€™s important to check in regularly with your financial advisor to make sure youâ€™re properly covered. Of course, itâ€™s typically less expensive to purchase life insurance the younger and healthier you are, so the earlier youâ€™re able to start planning, the better.