Matt Mendez, Vice President, Director of Insurance & Annuities
“Do I need it?” This is probably the most frequently asked question when it comes to life insurance. Although it may seem like a direct conclusion to reach, when you consider the various reasons behind a yes or no answer, it may not be as easy as we think. Reaching a decision to buy a life insurance policy is very much a personal choice, and not everyone wants or needs to be protected. A better and easier question to ask yourself is, “Would someone suffer financially if I passed away?” If the answer to that is yes, then you may want to consult with a trusted and insurance-licensed professional to delve deeper into the life insurance buying process.
What is Life Insurance?
Life insurance is a form of financial protection that can help your loved ones in the event of your death by providing cash to your family or loved ones after your death. This cash is known as a death benefit. Your family can use these proceeds to cover virtually any expense, such as funeral costs, mortgage or rent payments, college tuition, childcare, and more. Having these proceeds available also provides your family and loved ones with time to make their own decisions.
Oftentimes, thoughts about needing life insurance are triggered by key moments in our lives, such as marriage, divorce, the loss of a loved one, or adding a family member. These are all important changes that very much justify a discussion. The following are some additional groups of people who should consider owning life insurance.
Married or Partnered Couples
Many partners will find it difficult to make ends meet without the other earner’s income in the picture, whether the deceased spouse was the primary breadwinner or not. Married couples often have shared debts, such as a mortgage, credit card debt, or car loan. Allowing the surviving spouse the ability to maintain the standard of living you both worked towards is important to many couples. It also can help with any final expenses, allowing the surviving spouse time to grieve without the added financial stress.
Parents
Whether single, married, or a homemaker, it is incredibly important for parents to consider life insurance. It costs an estimated $230,000+ to raise a child to the age of 18, and that number is even higher if you plan to contribute to your child’s college education.1 That budgetary impact, coupled with the additional responsibilities the surviving parent is now tasked with, could be devastating to the surviving family. Those critical responsibilities could be costly to outsource for the surviving parent or caretaker. Life insurance can be a way to help ease both the financial and emotional burden.
Singles with Dependents
An increased number of individuals have been taking in family members to provide them with care and support—dependents other than children, such as aging parents or siblings. This presents challenges and responsibilities for the provider to ensure there is care for those family members should the provider pass away.
Retirees
Depending on the size of your estate, your heirs could be hit with an estate tax rate of up to 45%. The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million to $11.18 million for individuals, indexed for inflation after 2018.2 For 2023, the indexed exemption rose to $12.92 million ($25.84 million for married couples). Barring congressional action, the inflation-adjusted exemption is expected to return to approximately $7 million ($14 million for married couples) in 2026, effectively reducing the limit by half. Each state also has their own exemption limits, which could add to the cost. The cash from a life insurance policy gives heirs access to tax-free money to pay for immediate costs and more.
Business Owners
Most businesses protect against the loss of their important assets, such as vehicles, buildings, and equipment. However, many businesses overlook their most important asset—employees and owners. Who are the key people in your business? Consider what would happen to your business if one of them were to leave employment or pass away suddenly. Likewise, as a business owner, you need to take a close look at business continuation. Without proper planning, the premature death of an owner could result in the business being liquidated, sold to outside parties, or surviving family members feuding over the future of the business. To help increase your certainty that the cash may be available when it is needed to ensure an orderly transition, consider a buy-sell agreement with life insurance as a funding vehicle.
Even if you do not fall into one of these categories, you may still consider life insurance for the peace of mind it can bring to know your loved ones will be financially secure if something were to happen to you. Life insurance is not a one-size-fits-all solution. Once you have assessed your individual financial situation and needs, consult with an insurance licensed professional to help you determine if life insurance is right for you. Once in place, review your coverage annually or any time you experience a key change in your life.
1 How Much Does It Cost to Raise a Child?
2 Estate and Gift Taxes; Difference in the Basic Exclusion Amount
This material is being provided for educational and informational purposes only. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Copyright D.A. Davidson & Co., 2024. All rights reserved. Member FINRA and SIPC.