Purchasing life insurance is probably one of the easiest activities to procrastinate. In fact, many people unfortunately go through some life-altering event before they even think about purchasing life insurance, much less act on it.
For example, you may have recently gotten married, had children or had a health scare, making you think about how your loved ones would fare without you around. Whatever the reasons may be, it's important to distinguish when life insurance makes sense and when it simply does not.
Contrary to what many insurers will tell you, not everyone needs life insurance. In its purest form, life insurance is merely a form of financial protection in the event of your death. You sign a contract to pay premiums to an insurance company, and in return, the company agrees to provide a specified amount of money to your beneficiaries upon your passing.
This financial protection can be particularly comforting when it comes to providing:
- Protection for your family against financial hardship or to maintain their current standard of living.
- Cash to pay off mortgages, taxes or other debts so your heirs are not left with them.
- Funds to pay funeral expenses.
- A continuing income stream for your surviving family members.
- An inheritance for your heirs.
- A nest egg for future expenses such as your children's or grandchildren's education.
As you can see, life insurance is most applicable when you have dependents or heirs who count on you to provide for them. On the other hand, there are plenty of situations where life insurance does not make sense.
If you are single and don't have any dependents, you probably don't need life insurance. A salesman may try to persuade you to purchase a policy by telling you that premiums are lower when you're younger, so it makes sense to lock them in now. They may also tell you that by purchasing a long-term policy now, you will not have to provide evidence of insurability later.
While both of these statements are true, odds are that you'll be paying premiums needlessly if you follow this line of reasoning. If you truly don't need life insurance now, then why pay for it?
And what are the chances that your health will take a significant turn for the worse before you reach the point when you do need life insurance?
It's your money, but if you want to hang on to as much of it as possible, don't buy insurance before you can demonstrate a real need for it. The following are some circumstances in which you would most likely not need life insurance.
- If you are retired and have no dependents. At this time in your life, you most likely don't have large debts (such as a big mortgage) or dependents relying on your income. If there is no one who will be financially harmed when you pass away, you probably don't need life insurance. Plus, premiums for people over age 65 are very high and may even be unaffordable. An exception to this logic may apply if you are using life insurance as an estate-planning tool for tax purposes.
- If you are retired and have no dependents, and if your spouse has a high enough income. Life insurance should be purchased to replace the income or services you're currently providing for your family. However, if your family has other means of resources besides you, then it doesn't make sense to spend money on life insurance (unless for estate-planning reasons).
- If you are considering a policy for a minor child. The child probably does not need life insurance unless you would need the money to cover basic funeral expenses. Undoubtedly the loss of a child would be terribly tragic. Financially speaking, however, you would not experience a loss of income provided by the child. Therefore, life insurance does not make sense for minor children except as insurance against the cost of funeral expenses.
At the other end of the spectrum, if you have young children, a spouse or other family members who are relying on your contribution to the household income in order to pay the bills, then you probably do need life insurance.
Whether it's to pay off your mortgage or provide your family with a specified income stream, life insurance is an important financial tool that can help you plan for the uncertainty of the future.
If you are interesting in buying life insurance, the health of your provider is an important consideration. Below is a table of
top-rated life insurance companies.
Melanie Dufour joined TSC Ratings as a life and health insurance analyst in February 2007. She has an actuarial background with a BS degree in Actuarial Mathematics and Finance from Concordia University in Montreal, QC. Melanie has most recently worked as an actuarial analyst with Aequicap Insurance Company in Ft. Lauderdale, FL and prior to that as a senior analyst with Watson Wyatt Worldwide in Montreal, QC.