Do You Even Need Life Insurance?

Does it seem like that every party you go to there is a guy there who sells insurance? He'll corner you, give you his speech and his card and tell you that "you need more insurance and why wouldn't you get more, it's so cheap". This article will prepare you with the comeback lines for him to leave you alone for good.

There are certain times in your life when you don't need life insurance. For example, if you're young, live in an apartment and are single, there's a good chance that you don't need life insurance. If you die, your estate will pay off any debts that you owe and anything left will go to any beneficiaries or people set out in your will.  (Side note - if you don't have a will or beneficiaries set in place, DO IT NOW or a judge will be deciding who'll be getting your personal items and money).

But what happens if you're older, you have life insurance already in place and are not sure if you have enough or if you need it anymore. How do you know when you should buy another or cancel a policy?

The answer to this question lies in some number crunching. Consider this simple example:

          50-year-old male - married. Two children. Earns $70,000 a year.

          1 child starting college: freshman. Tuition is $30,000 a year. Parents paying the entire bill. Other child is grown and has left home.

          $500,000 mortgage left on their dream house - no intentions of moving to another house while still living.

          No other debt.

          Wife has successful career earning $70,000 and could support herself on her own should her husband die.

Should this man have life insurance? Most definitely. Should he die today, his wife could support herself on her salary - but could she afford $30,000 / year tuition, and afford to keep the mortgage on the house - NO.

By doing simple math, the widow would need 4 years of tuition and money to pay off the mortgage. This would then leave her in her dream house, which will be paid for, and a comfortable salary for her to live on. In this example, the husband should have (at a minimum) $620,000 of life insurance.

Let's say he has thought this all through and has $1,000,000 of life insurance on his life.

The evaluation of insurance gets to be tricky when the children have left home. After paying down the principal on the mortgage to $200,000, the husband re-evaluates his life insurance. What happens now?

Is it necessary for him to have $1,000,000 of life insurance on his life and pay the premiums, when they only have $200,000 of liabilities against their name? It would seem logical that the minimum life insurance he should have on his life (providing his wife can support herself after his death) would be $200,000.

Is it always that simple in real life? No.

It would be a worthwhile discussion to have with his wife and a financial advisor about reducing his life insurance coverage. The reason I bring up a financial advisor is most of them are trained in running life insurance projections. They will think about factors that you may not have and be able to discuss life insurance along with your goals, to make sure you're making sound decisions.

One thing you should do after reading this article is examine if you have the right amount of life insurance. Look at your current debts/liabilities (mortgages, car loans, etc.) and your future liabilities (college tuition, weddings) and determine how much this would cost in future dollars (e.g. college in 2020 is not going to cost what is does today) and determine the right amount of life insurance you should have.

Once you've figured out how much you need and have it in place, be sure to tell the insurance guy / girl at that next party. They'll move on quickly!

(FYI - One of the rules in providing life insurance is that beneficiaries are not allowed to have large monetary gain from the owner's death. The beneficiary is supposed to have "just cause" for the policy. For example, I couldn't go to my local insurance agent and have them draw up a $10,000,000 policy on my wife. If I had a $10,000,000 mortgage on my house, then I could as I have "just cause", but just because I wanted to have a policy of that size doesn't mean that I'll get it.)