Do You Need Life Insurance? 6 Questions to Ask

Thinking about life insurance is kind of like eating dry turkey – it’s something you might feel like you have to do occasionally. But is that really true? Do you really need it? Today, let’s help you answer the age-old question, “Do I need life insurance?”

The Reasons For Life Insurance

It’s always good to remember that insurance is simply a means to hedge against a risk. In the case of life insurance, it’s the means to hedge against the financial risk of you dying. For most people, this risk would be a financial hardship for their family should they die unexpectedly.

However, there are other certain situations where the risk of death may need to be hedged. We’ll dive into a few of them shortly, but first we need to talk about where life insurance isn’t needed.

Reasons NOT To Buy Life Insurance

Occasionally, you’ll hear someone mention life insurance as a way to build wealth. While permanent life insurance can be a means of protecting wealth, it is not the most efficient way to build wealth.

(Be sure and read my last post, The 4 Types Of Life Insurance to understand the different kinds of policies.)

Usually, when something attempts to be all things to all people, it fails on all accounts. If you have a need for life insurance, by all means buy it. Just remember to factor in both the policy premiums and the opportunity cost of investing elsewhere into the total cost of insurance.

If your goal is to build wealth, then investing in your 401(k), brokerage account, IRA or Roth IRA will be a much more efficient means of meeting your needs. Let your investments be investments and your insurance be insurance.

So, what are the questions you should ask before buying a life policy? Let’s take a look.

1. Does Someone Rely On You For Support?

If there are people who rely on you for financial support, then you are likely in a position where life insurance is needed.

Most often, this situation presents itself in the form of two young parents caring for small children. In cases like this, life insurance is a good idea for both spouses. If one unexpectedly dies, the surviving spouse would need financial support to raise the kids and meet living expenses.

At Prana Wealth, many of our clients don’t have kids – they’re DINKs and SINKs (dual income, no kids and single income, no kids). For people like us, the true need for life insurance is greatly reduced, if it’s even needed at all.

However, there’s another scenario we need to consider. Those who are caring for an aging parent or special needs family member will have a potential need as well. These days, more and more people find themselves in the position of caring for an aging parent or loved one.

2. Do You Have Significant Debt?

If you have a significant amount of debt that your other assets would not be able to cover in the event of your death, then it’s time to consider shopping for a policy.

Mortgages, college loans and other potentially large liabilities can be problematic when someone passes away. Having enough death benefit to pay down these debts can make things much easier for your spouse and family if something happens to you.

For married couples without kids, having enough death benefit to cover a mortgage is a simple, low-cost idea to put in place for one another.

However, if you are debt-free or have sufficient assets to pay down your debts, life insurance may not be needed.

3. Do You Own A Business?

If you’re a business owner, that opens an entirely new can of worms. A life insurance policy can provide enough liquidity to pay for someone to come in and run the business during a transition.

It could also help pay for any expenses associated with selling the business, should your heirs be unable or unwilling to step in and run things. This includes business valuation services and expenses associated with a potential sale.

Finally, business partnerships often set up arrangements incorporating some sort of cash-value policy as both a means of business continuity and a benefit to each partner. Examples would be key person insurance or a buy / sell agreement.

4. Do You Own Illiquid Assets?

Often overlooked, those who own significant illiquid assets, such as real estate, private equity investments or collectibles, may need life insurance to provide cash to their estate should they pass away unexpectedly.

Many of these illiquid assets, real estate in particular, have regular expenses associated with them. This may come in the form of property taxes, property insurance, maintenance and upkeep.

Life insurance could help if real estate comprises the bulk of your net worth.

The last thing you’d want is for your executor or heirs to sell these assets at a steep discount because there wasn’t sufficient liquidity to cover the expenses associated with these assets.

5. Will You Owe Estate Taxes?

Years ago, estate taxes were a much bigger concern than they are today. But if you are someone with significant net worth, you’re likely already using some sort of cash-value policy as part of your estate plan to cover a potentially large estate tax bill.

Estate taxes could create a situation where the executor and heirs would need to sell assets quickly in order to create enough liquidity to cover the tax bill. Obviously, this could be problematic for many reasons. Cash from an insurance policy could potentially help.

This year (2020), each person can pass up to $11.58 million to an heir without incurring any estate taxes, so few people will run into estate tax problems.

Such a high exemption amount is a recent phenomenon. As recently as 2002, the amount was only $1 million. If estate tax laws change, this could become an issue again. But for now, most people will not need life insurance for this purpose.

6. Do You Want To Make It Easier On Your Executor?

Finally, you may want to buy a life insurance policy to make things easier on your executor and your heirs. Having a little bit more cash in your estate will make things run smoother as assets are distributed.

Quite often, people will buy a small policy to cover their burial and estate expenses. This is something that can be easily done by purchasing the optional group coverage that your employer offers.

If you already have sufficient assets to pay these expenses, then leaving a death benefit for this purpose is less of a need than a want. That’s okay, especially if it helps you sleep better at night.

Plus, it’s a really nice thing to do!

Just remember, in this post we’re trying to answer to determine if you have a need.

So, Do You Need Life Insurance?

Life insurance is always a great idea – but only if you have a need for it. If you answered “yes” to any of these six questions, then you have a potential need.

If not, that’s okay. Sometimes no coverage is the right amount.

If you still wondering, “Do I need life insurance?”, click here to set up a quick, complementary introduction call to see if Prana Wealth is a good fit. We do still have capacity to take on new clients this year.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. In the past, we’ve helped many clients make good decisions around life insurance and we’re here to help when you need us.

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