Life insurance is a part of estate planning that can divide people. Some people think that you should always get life insurance; some people see it as an unnecessary cost.
In this article, we will break down exactly when you need life insurance and when you might not.
What Is Life Insurance?
Life insurance will provide your family with a payout if you die of a cause covered in the policy. The type of policy you purchase will determine the amount they are paid and your premiums. Some life insurance policies may include funeral expenses and other associated costs.
When Do I Need Life Insurance?
There are some circumstances where life insurance is necessary to protect your loved ones in the case of your death.
If you are the sole provider
If you are the sole breadwinner of your household, you need life insurance. The payment will keep your family afloat while they sort out their financial situation. It can be used towards paying off the mortgage, education or training for your partner, and living expenses. This money will allow your family time to grieve and work out how they are going to replace the lost income.
If you have children
If you have children, you should absolutely get life insurance. Your household finances will have been calculated based on two incomes, and therefore your family may struggle to maintain their current lifestyle on one income. Life insurance payouts give your family time to evaluate finances and look at ways to survive off one income. Even if your family is financially stable, the money can be put in trust for your kids’ futures.
If you have a mortgage
Your mortgage may be calculated based on two incomes or on your higher income. Losing your income will be a devastating blow to your family and may result in your partner struggling to make payments. Life insurance can pay off your mortgage, thereby significantly reducing your family’s living costs. Even if you have no partner or dependants, if you want to leave your property to someone after your death, you will need life insurance to pay off the mortgage. Otherwise, the bank will sell your property after your death to pay off the mortgage, and the remainder will go to your estate.
If you want to avoid or reduce inheritance tax
Some life insurance policies are not subject to inheritance tax. This means that your beneficiaries can enjoy your money without losing a large chunk to taxes. You should consult a financial advisor if this is your reason for getting life insurance to ensure your policy will avoid inheritance tax.
If you have a business partner
If you partially own a business and your business partner relies on your expertise or financing, then you may need life insurance. You and your business partner should have clear, legally binding succession plans if one or both of you die. Life insurance may be used to keep the business running while your business partner replaces your expertise or financial backing. It may also be used to buy out your heirs to allow your business partner to retain control of the company.
When Don’t I Need Life Insurance?
If the following reasons apply to you, it does not mean that you don’t need life insurance at all. It simply means it is less pressing, and you can weigh up the decision for yourself. Life insurance is very useful to keep your family afloat while they grieve your death, so this should factor into your decision.
If you have no dependents or partner
If you have no one to care for after your death, then life insurance is not as pressing. Your assets will be taxed and split up as per your will.
If you have a dangerous job
If you die or get injured on the job, your company will compensate your family. Having a dangerous job will often drive life insurance premiums up and, therefore, make it less cost-effective. It is hard to know how we will die, but if the likelihood is that it will be on the job, then life insurance may not be worth it.
If you are young
The chances of you dying unexpectedly are much lower when you are young. If you do not have any dependents, then you might decide to forgo life insurance. Consider your relationship with your partner before you make a decision. If your finances are separate and you do not live together, then you may decide not to get life insurance. If you do live together, even if your finances are separate, then you should consider life insurance. Unexpected death may leave your partner having to pay months of rent on a place they cannot afford on their own.
Who Gets My Life Insurance When I Die?
Your life insurance policy may be left to one or multiple beneficiaries. If you want to give multiple people a piece of your life insurance payout, then you should make your estate or trust the beneficiary of your life insurance policy. Then you can leave provisions for the money in your will.
If you want to make one person the beneficiary of your life insurance policy, then you should make them the sole beneficiary of your policy. You should also state this in your will so that there is no confusion and to reduce the likelihood of challenges.
You should not rely on family taking care of other people or knowing that you would want people taken care of. If you want portions of the money to go to certain people, you need to set it up in the proper manner.
Life Insurance and Poor Health
If you have poor health or a medical condition, it can be difficult to know if you should get life insurance or not. For starters, life insurance will be very expensive if you have underlying medical conditions. The insurance company will require bigger payments to cover your payout. However, a medical condition may raise the likelihood of you passing earlier than expected. Ensure your life insurance policy covers your medical condition rather than excludes it.
We are lucky that the NHS covers treatment costs, but there are other costs for serious illness. You need to factor in partial or complete loss of your income, transport costs, medical equipment or home care. You might have a partner or family member who reduces their hours to care for you. Life insurance will help catch your family up on costs that may have accumulated while you were sick.