Lessons on life insurance

May 30, 2014

Do you need life insurance? Maybe you do and maybe you don’t. You may need life insurance if you have dependents who would find it difficult to get by without your income. Or, you may want to leave a legacy to children or grandchildren. You may not need it if no one depends on your income, or you have no desire to leave a legacy.

The above are broad strokes; the real way to find out is to do some thinking and analysis.

Begin with the question, “What is my stage of life?” Let’s say that you are “starting out.” Although you may not have a spouse or children who could be dependents, you may have obligations. Did your parents or grandparents cosign your education loans? Did someone cosign a car loan for you because your credit was not yet established? If you died before these loans were paid, your cosigner would be on the hook. So, although you are just “starting out,” you may need life insurance to pay your debt.

Are you a single adult? This covers a growing percentage of the population, a broad spectrum of ages, lifestyles, and obligations. Perhaps you were never married. Perhaps you were and are not now.

Today, children and spouses are not the only dependents. With an increased aging population, many adults are supporting parents either financially, or by providing care. In both cases, your demise would have a major impact emotionally and financially on people who are not in the best of shape financially, or physically. Also, your final expenses could be a nasty burden on them. In this situation, life insurance is necessary.

Many people are single parents. In case of death, they have a bigger problem than would a two-parent household. In a two-parent family, if one of the parents dies, the other can go to work and raise the kids. They might not be on easy street, but someone is there. If you are a single parent and you die, who will take care of your children? Does your will say who will raise your children? If it doesn’t, a court might decide who raises your children and the choice might not be the same as the one you would make.

Imagine the emotional burden you would put on your parents if they had to raise your child/children. If this is you, obviously, you need some life insurance. It costs a lot of money to raise a child and even more to educate them.

Let’s return again to debt obligations. You may be paying off student loans, or you might still be accumulating them. Did someone loan you money to purchase a house or condo? Upon your death, your cosigner is liable. If this is you, you need some life insurance.

Are you a DINK – Dual Income No Kids – family? I first heard this, many years ago, from the horse’s mouth. Do you have a mortgage? Do you have joint credit cards, or other obligations? Can your spouse, or significant other “make it” without your income, should you die? You might want to run some calculations to see what would happen in the event someone dies.

Lastly, you may need life insurance to preserve your estate. Although no one is dependent on you for their survival, you may have spent your adult life building an estate that you’d like to pass along to children, grandchildren or a favorite charity. Well, the state and federal governments have some nasty inheritance and estate taxes. You might use life insurance in a creative way, such as stuffing it into an irrevocable life insurance trust (ILIT) so that it is 1) not in your estate, and 2) it is used to pay the estate and inheritance taxes.

Life insurance planning, like other elements of financial planning, should not be done in a vacuum. It should be viewed as part of your overall financial plan and considered with your goals of savings and retirement as well as estate planning. As your life changes, your goals may change as well, so it is important to review your overall plan at least annually.

This column focused on, “Do I need life insurance?” The next questions to be answered are “how much?” and “what kind?”

We suggest that you discuss your specific situation with a qualified financial, tax or legal advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann is a financial professional with and securities offered through LPL Financial, member FINRA/SIPC.