The purpose of life insurance is to replace an economic loss that might occur with the death of a person. If you’re thinking about buying a life insurance policy review the top reasons that people buy life insurance. Chances are you need a life insurance policy if one of these applies to you. While there may be other reasons besides those listed here, these are the most common. If one of these doesn’t apply to you, perhaps you need to rethink if you even need a life insurance policy.
Life Insurance for Income Replacement
The top reason that someone buys a life insurance policy is to replace their income. For example if you earn $50,000 a year then your after tax income is likely around $35,000 per year. If you die at age 40, 25 years before your planned retirement age, your family loses out on $875,000 you would have earned over those 25 years ($35,000 x 25 = $875,000). That doesn’t include possible promotions and future raises. This formula doesn’t necessarily mean you need to buy $875,000 worth of life insurance coverage – however if your family relies on that income to pay the bills, you at least need some life insurance coverage.
Life Insurance for Debt Payoff
The biggest debt most Americans have is the debt on our home – our mortgage. Another major reason why we buy life insurance is so that our family can pay off the mortgage and stay in the home and not have to move. Buying a term life insurance policy that at minimum would cover the mortgage provides the peace of mind that you won’t leave your family with a monthly mortgage bill. Besides mortgage debt, people buy life insurance to cover student loan debt, or credit card debt.
Life Insurance for Final Expenses
While retired seniors may not need life insurance for income replacement, they may need it so that they don’t have to burden loved ones with the high cost of final expenses. Final Expense life insurance is a specific type of insurance you can buy to cover funeral, burial, or other final expenses. You can buy as little as $5,000 of coverage, and if you don’t have much in savings to leave behind which can cover these costs, you may want to consider buying a final expense policy.
Life Insurance for Education Funding
If you have children that you hope will go to college one day, you may already be thinking about how expensive college can be. If you die without life insurance coverage, your kids may have to take large student loans, or not go to the school of their choice. Life insurance can provide the funds to pay for your child’s education and you should consider this when calculating how much life insurance coverage to buy.
Life Insurance for Second Marriages
If you are in a second marriage there may be several reasons why you might want to purchase life insurance. If you have kids from a first marriage that you want to leave assets to – such as savings or investments, you can buy a life insurance policy that will be paid to your spouse -or vice-versa. This will make sure that you leave something behind for both your new spouse and kids, and there is no animosity between them.
Life Insurance for Pension Maximization
If you plan on getting a pension at retirement, having life insurance can allow you to maximize your income. For example, you can take the “single life expectancy” option, which pays the highest monthly amount. With this option your pension payments will not continue to your spouse if you die, however because you have life insurance your spouse will be taken care of financially, while you have maximized your monthly income from your pension.
There are other reasons why people buy life insurance, which include business reasons, estate planning, having a special needs child, and using life insurance as collateral for a loan. But the reasons above are the main uses for life insurance. If any apply to you, it’s time to shop for a life insurance policy.