When it comes to life insurance, one thing that most people can agree on is that it is necessary at some point in most people’s lives. The part where many people get confused is in determining how much is necessary, what type is best, and how long they should own it. Just like any other answer for personal financial planning matters, the answer is generally “it depends on your situation.” Nevertheless, here are a few misconceptions that deserve some attention when determining what is right for you:
Whole life insurance is a better buy for young people: Let me be clear – there is a time and a place for temporary (term) and permanent (whole life, universal life, and variable life) insurance. However, for the average young couple or family, term insurance generally is a better fit. The reason is because young families rarely have accumulated sufficient wealth to take care of their spouse and dependents if they died tomorrow. Therefore, their life insurance priority is to purchase enough of a death benefit with the dollars they have available to replace lost income after death. While whole and term life insurance both provide death benefits, the young couple’s limited dollars can buy significantly more term coverage than its whole life counterpart. Consequently, should they endure the misfortune of dying within that time period, then the higher death benefit will be a life saver for the financial stability of the surviving spouse and minor children.
Coverage is necessary only for the breadwinner: This is a common mistake among families where one spouse works inside the home. The stay-at-home spouse may not earn a paycheck, but they still make financial contributions to the household that will need to be replaced if they die. For instance, if the deceased spouse took care of children, then now the surviving spouse must incur the costs of childcare. Even though this might not be a forever expense, enrolling your child in a program that meets your comfort level can have a profound impact on your budget in the short-term. For this reason, it is important to assess a monetary value to the services your spouse provides that you cannot duplicate if they pass away and insure them for at least that amount. After all, you may be able to iron your own clothes, but it is highly unlikely that you can work full-time and care for your children full-time, too.
I won’t need life insurance at retirement: For many people this statement is true. These are usually the people who have little or no debt, and sufficient assets to take care of their survivor’s needs when they die. While this is a reality for many people, it is unwise to think that the start of retirement signals the end to the need for life insurance. It is not that simple. Think about it: the primary need for life insurance for young working couples is income replacement of the deceased spouse. For many retirees, income replacement still presents a need for life insurance.
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For example, consider the couple with one spouse who has a pension. Depending on what payout option that retiree chose, their death could represent a pay cut to the monthly benefit for the surviving spouse. Additionally, whereas that household used to have two monthly social security checks, it now has one. This can be a game changer for the surviving spouse if the remaining assets are insufficient to cover their needs. Therefore, before ditching your life insurance coverage at retirement, make sure to think about how your death will financially impact your surviving spouse.
Life insurance considerations can be a big deal, but with sound, objective counsel you can navigate through its complexities and make a decision that is right for you and your family.
Life is a journey. Plan for it.