That’s the wrong question.
Life insurance is not for you, it’s for someone else.
A better question to ask has two parts:
- “Who would suffer financially if I die and
- How much life insurance would sustain them in my absence?”
The first part is easy to answer. It is basically the short list of people who depend on your ongoing earning power: Spouse, kids, grandkids, parents, business partners, etc. Make that list as it applies to you.
The second part takes some thinking. You need to estimate the amount of money needed for those people to continue in their current lifestyle until such time that they can sustain themselves without the extra financial help. The answer will not be precise because the future is uncertain and you are dealing with educated guesses. Use your best guess right now of what’s necessary in the future.
If you already have financial assets (like investments, savings and real estate) that can cover some or all of those needs, you can deduct that amount from your insurance estimate. If you get life insurance at work, deduct that as well. The result is your life insurance target.
Sometimes we are too generous in estimating our dependents’ financial need, and the insurance target gets large. That makes life insurance premiums costly and we decide against obtaining life insurance due to the cost. But it’s not an all or none decision. You don’t have to fully fund your life insurance target right now, but if someone is truly depending on your income, something is better than nothing.
Life Insurance and Young People
Young people starting out with nobody depending on them generally don’t need much, if any, life insurance.
But for a young person with a dependent spouse or kids or business partner, the need for life insurance becomes a real question.
A young person with a young family has, in my opinion, a probable need to have life insurance because often they haven’t had time to accumulate wealth. Life insurance provides an estate in the event of a death. In this example, life insurance need would decrease over time as the person’s net worth increases.
Term life can be cheaper than whole life, look into that if your insurance need will decline over time.
Life Insurance and Older People
Older folks who have spent a lifetime saving and investing may not need life insurance at all, since their assets may be sufficient.
However, life insurance has an important use as an estate planning tool for those that have substantial assets at their death. That’s a more complex use of life insurance that would come up in the estate planning process, but generally speaking life insurance can be used to fund estate taxes or to pay debts, in order to preserve the value of estate assets.
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