How does life insurance work?
Life insurance is a tool in your financial toolbox designed to protect your family and financial dependents by providing a lump sum cash benefit to the beneficiary of the policy when you die. If you took out a $1 million life insurance policy where you were the insured party and your spouse was the beneficiary, your spouse would receive a $1 million tax-free payment upon your death.
Anyone with young children or financial dependents should have life insurance. Failing to do so puts those who depend on you in a precarious financial situation. We all die, it’s only a matter of when. What would happen to your financial dependents if you died suddenly? The entire point of life insurance is so that you don’t have to worry about that.
Do you need life insurance if you don’t have kids or other financial dependents?
Ask 10 different people that question, and you are likely to get 10 different responses. My take on this question is that financial resources are limited, and we need to prioritize our financial goals and act accordingly.
If you are in you are single, in your 20’s, have no financial dependents, a mountain of student debt and no retirement nest egg does it make sense for you to run out and buy a life insurance policy?
Of course not.
Whatever leftover money you have at the end of the month should be dedicated to building an emergency fund, paying off debt and investing for the future.
However, there are several reasons you may want to consider buying life insurance, even if you don’t have kids or financial depends.
You want to lock in your insurability
Insurance is a bit of a paradox; It’s cheap and easy to get when you don’t need it, and expensive or impossible to get when you need it most.
When you are young and healthy, insurance companies will offer you insurance policies with a low premium and basically rubber-stamp your approval provided you don’t smoke or have any serious health problems. The only problem? You probably don’t need any insurance right now.
When you are older and married with kids, possibly with a financially dependent parent, you need life insurance. The only problem? It might be more difficult to get approved for a life insurance policy, especially if you have developed any health issues (which gets more likely as we grow older).
Some people choose to get insurance when they are young and don’t need it so that they can “lock in their insurability”. If you know from your family history that you are more likely to develop a specific health problem, you may want to consider buying an insurance policy today in the event you become uninsurable down the road.
You own a home
One of the worst financial products being pushed on people is mortgage life insurance. A mortgage insurance policy pays your mortgage balance if you die before it’s paid off. While this is important because it prevents your spouse or whoever you leave behind from having to pay the mortgage themselves.
The problem is that mortgage insurance policies have a declining benefit and fixed premiums. Meaning your insurance coverage gets smaller each month you make a mortgage payment, but your premium remains the same. It’s a bad deal.
Say no to the mortgage insurance and take out a personal life insurance policy from an insurance company (not your mortgage company). You will get a better product at a lower price.
You own a business
Even if you don’t have kids, a spouse or a house you may need life insurance if you own a business, especially if you have partners in that business.
Let’s say you and your business partner own a business that is worth $1 million. You and your business partner can each take out a life insurance policy with a $500,000 payout. If your partner dies, you will have enough cash to buy out his half of the business from their beneficiaries who would inherit your partners half of the business. These types of insurance contracts protect the business from nasty legal disputes.
Business owners may also choose to take out a life insurance policy on critical employees. If you have an employee that is so valuable that if they were to suddenly die it would jeopardize the viability of the business, it might make sense to take out a life insurance policy on that employee. In this case, the business would be the beneficiary of the policy. That way, if the employee dies, the business will be financially stable while you seek to replace that employee.
Can you think of any other reasons that someone without kids might want to buy life insurance? Let me know in the comments below.