To put it simply, life
insurance protects those who depend on your paycheck.
If you die prematurely, sooner then you’re suppose to, that life insurance
provides your dependents with ongoing income to replace yours, until (or
unless) they can live comfortably without it. It can also provide a timely
emergency fund for medical, legal, and funeral costs, should family savings not
be enough to cover them.
Life insurance
is not a good way to strike it
rich for "pennies on the dollar." It's not the surest way to leave a life of luxury for future
generations of your clan. In fact, even though some life insurance policies are
combined with a savings plan, the savings plan is essentially independent. The
life insurance component of these cash value policies retains its fundamental
purpose: income protection for your dependents after you die.
Given
this simple definition of life insurance, it should be easy to decide whether
you need it. Start by imagining yourself gone tomorrow. (We know, it's morbid,
but bear with us.) What would the impact be?
Could
your family afford the funeral expenses? Have you left a complicated will or
perhaps no will at all? More importantly, what about your spouse, children, and
other dependents? Are they counting on your paycheck in the years ahead to
cover basic needs and/or future savings goals? If you are the primary caregiver
to dependents, what will it cost to replace you with a paid provider, and for
how long?
If you
are single, or one-half of a two-income, no-dependents household, you probably
won't need much life insurance, if any. With a little planning, you can
establish a low-risk savings fund to cover funeral costs, and invest the money
you would have paid for insurance premiums. You may also want to obtain
coverage that will pay the estate taxes on a huge estate so heirs don't have to
liquidate assets at unfavorable prices to pay them. If you are right now a
successful investor, then you may be a prime candidate for such life insurance.
These issues can get complicated, and may be best left to a discussion with an
estate planning attorney.
On the
other end of the spectrum, if you are the sole provider for a large family with
little savings, you are likely to need substantial life insurance. After basic
food and housing is covered, life insurance premiums are likely to be next in
line in terms of priority, perhaps even ahead of auto loan and credit card
payments, and certainly ahead of retirement savings.