Determining when to buy life insurance (and how much insurance to purchase) can be complicated. Not only is starting a discussion about your or a loved one’s potential end of life uncomfortable—many outright try to ignore the possibility—but there are a lot of different products to choose from and things to know before you buy.
For example, do you want term life insurance or whole life insurance? Should you purchase a policy from an independent insurance agent or one of the many “captive agents” that only work with a single insurance company.
However, tackling this difficult decision sooner is better than putting it off until later. Even if you don’t make a decision right now, doing your research and weighing your options is the best way to get the coverage you need to protect your loved ones at a price you can afford.
Why Do You Need Life Insurance?
There are a lot of reasons to purchase a life insurance policy. While your own reason for needing life insurance will depend on your financial situation and goals, here are a few examples of common reasons why others have purchased insurance in the past:
Reason #1: To Eliminate Your Student Debt
While some forms of student debt, including federal student loans and PLUS loans, are dischargeable upon your death, private lenders do not have a legal obligation to cancel student loans upon the death of the student or other borrower. While they cannot force your loved ones to pay your outstanding debt, they can take the money owed out of your estate before it gets transferred to your inheritors.
If you wish to take out life insurance specifically to prevent your loved ones from having to bear the burden of your student debt, then a simple term life insurance policy is the most common way to do this. Term life is often very affordable for younger applicants.
For example, according to Nerdwallet, in June of 2023, the average cost of a $500,000, 20-year term life insurance policy for “super preferred applicants” is about $222/year for men and $187/year for women.
This, of course, is an estimate for a term life policy that may have involved insurance underwriting—your actual cost for your term life insurance may vary depending on where you buy your insurance, the coverage amount, your general health, and other factors.
Reason #2: To Avoid Defaulting on Auto Loans
If you have a car loan, this is another debt that your loved ones could be stuck with in the event of your death. If someone cosigned on the loan for you, then they would be responsible for payments upon your death, regardless of whether they inherit the vehicle.
Some states also require surviving spouses to pay off some or all of the remaining balance on a deceased spouse’s loan. If neither of these situations applies to you, then your surviving relatives may not be responsible for the debt, but the lender would likely repossess the car if it isn’t paid.
A life insurance policy can protect your loved ones from debt collection or repossession of your vehicle in the event of your death. If you have a loved one who relies on your vehicle for their livelihood or even just to get around for their daily tasks, this can be a critical consideration.
In the event that your vehicle is totaled as a result of the circumstances surrounding the end of your life, having a life insurance policy can help grant your loved ones the financial security they need to replace the vehicle with a suitable alternative.
Reason #3: To Cover Your Mortgage
If you have a mortgage, it’s likely your largest debt. While it’s important to protect your family’s home with life insurance, it may not be necessary to buy enough coverage to completely pay off the loan.
Rather, look at your monthly mortgage payment. Consider how much support your family will need to keep up with it if your income were lost and how long they would need that support to continue.
Some questions to keep in mind when choosing a life insurance policy to help cover mortgage costs after your end of life include:
- How many payments remain on the mortgage?
- How much equity is in the home?
- Who would live in the house after your death?
- If you have children, how old are they?
- If you have a spouse or wish to pass the home on to another adult, what is their income and earning potential?
Answering these questions can help you find the best term or whole life insurance policy to help your loved ones live their best lives.
Reason #4: For Small Business Continuity
If you own a business, you know how critical you are to its success. A life insurance policy can help protect your business from the financial impact of your death. If you started your business as a joint venture with someone else, you could even purchase life insurance for your business partner (and vice versa) to help ensure the business’ financial stability should one of you pass.
If your business is successful enough that you’ve managed to amass a large estate, then life insurance can also be used to pay any applicable estate taxes.
Reason #5: You Have a Large Estate
If you’re fortunate enough to have a large estate to pass on to your heirs, then some of that inheritance could be subject to estate tax. Typically, life insurance is delivered to beneficiaries free of tax, making these funds available to cover any estate taxes that may be owed upon your death. In 2023, an estate tax filing is required only for estates valued at more than $12,920,000.
This helps to streamline your large estate planning, since it means having to set aside fewer resources from your estate for paying taxes and giving more to your inheritors.
Reason #6: To Ensure Your Spouse’s Financial Security
If you’re married, then you’re part of a financial team. Whether you’re a breadwinner or provide unpaid support for your household, your contribution is vital to maintaining your family’s quality of life.
Consider what it would cost to replace your contribution in the event of your death. If you’re a breadwinner, then you probably will at least want to replace your income long enough for your spouse to become self-sufficient. If not, take an inventory of the things you do to maintain your family’s quality of life and consider how much it would cost to pay someone else to do them.
According to World Population Review (WPR), “the average household in the United States spends $61,334 a year on expenses.” However, some states have a higher average cost of living than others. For example, WPR data shows that Hawaii has a price index of 193.3 out of 200—where 200 would be double the average for the USA. Meanwhile, Florida has a price index of 100.3 in 2023—putting it at almost exactly the national average.
Reason #7: To Pay for Your Child’s Care and Education
If you have children in your home, then the cost of replacing the work of a homemaker becomes much higher. Caring for children on top of maintaining a steady income is an enormous challenge. Without financial security, it can be difficult to provide the best upbringing for your children.
Additionally, you’ll want to plan for your children’s future, and this often includes college tuition. Make sure to consider what this will cost at the time your children are college-aged. Keep these facts in mind as you’re making your estimates:
- Educationdata.org reports that in 2023 the average cost of attending a 4-year public institution, including tuition, fees, room and board, costs an average of $102,828.
- In the span of 27 years, the price of attending college has almost doubled, outpacing wage increases by nearly 800%.
- Many factors play into the cost of college for a particular individual. Think about where your family might look for savings as well as what kinds of educational opportunities you believe are important for your children to have. Variables that tend to affect the price of education include
- Whether the institution is private or public
- In public colleges and universities, whether the student attends in their state of residence
- Whether the student pursues a 2-year or 4-year degree (or higher)
- How long the student takes to complete their degree
- Whether the student is “in-state” or “out-of-state” for that institution.
These are just some of the factors to consider when estimating the cost of higher education. You can find a lot more helpful information at Educationdata.org.
Reason #8: You’re Young and Currently Have No Major Health Risks
You might think that life insurance is something people start looking at when they’re getting older or starting to develop health problems. In fact, buying life insurance when you’re young and healthy is the way to capture the best possible rates.
If you’re young and healthy, you’ll have an easier time passing the life insurance underwriting process to qualify for higher-value coverage at a better rate.
This is an ideal time to establish a whole life policy, which will build value over time to provide you with long-term security while also protecting your loved ones. Premium rates will only go up over time. If you establish your life insurance policy while you’re young and healthy, you’ll be able to enjoy lower costs for the life of your policy.
Reason #9: You Have Elderly Parents
Especially if you’re still relatively young—and maybe still lean on your parents in a pinch—you might not think of them as needing your help. As they age, however, it’s likely they will need some assistance with day-to-day tasks.
If you’re not there to help them, what support will be available? Do they have sufficient investments, guaranteed income, or other resources to fund potential costs like assisted living or memory care? If not, think about these costs when deciding how much life insurance coverage is appropriate for you:
- The average cost of assisted living in the U.S. is about $54,000 per year—though this varies from state to state. (Source: Senior Living)
- Also according to Senior Living, “the median yearly cost of in-home care in 2021 was $59,488 for homemaker services and $61,776 for a home health aide.”
- In-home caregivers charge an average of $20–40 per hour.
When determining how much life insurance you need, always remember to account for inflation. The rate of inflation can vary considerably from one year to the next. Over the past 10 years, inflation has ranged from 0.12% to more than 3%. Online calculators like this one from SmartAsset can help you think about future costs.
Reason #10: You Don’t Have Enough Life Insurance to Cover Major End-of-Life Expenses
One of the best reasons to purchase life insurance is because you don’t have any yet. Over the past decade, employer-paid group life insurance has dwindled, leaving nearly half of U.S. adults without coverage as of 2022 (source: Statista).
Life insurance is designed to solve the many financial problems that arise when someone dies, and some policies can also help secure your financial future during your lifetime. Take some time to learn about the different types of policies available and think about the amount of coverage you need.
Then, talk to a few different insurance professionals to determine where you can find the best value that fits your family. Take a look at ELCO Mutual’s commonly asked questions and browse our blog for more information.
Want to Apply for Term or Whole Life Insurance Now?
If you’re looking for a life insurance policy now, reach out to ELCO Mutual to get started. We can connect you with a friendly life insurance agent who can help you choose the best policy to meet your needs and goals.
