The primary purpose of life insurance is to pay money to named beneficiaries, such as your spouse or children, in case of your death. There are many different types of life insurance and other products which combine the life insurance concept with services such as investing or lending. Rather than going into details about the different types and features, this article will try to help you decide whether you need life insurance (in its very basic format) given your personal circumstances.
Who Does Not Need Life Insurance
While insurance salesmen might try to tell you otherwise, not all people need life insurance. If you are single, very young, earning relatively low income and do not have anyone else to support, a life insurance plan might not be the best investment, or at least not yet. If you have a spouse and children (or other people) who rely on you and your income to pay for life’s basics such as rent, food, education or mortgage, you should consider life insurance as a very effective tool when planning for your and your family’s future.
Protecting Your Family
Unfortunately, while life expectancy has grown significantly all over the world, there are still (and always will be) many people who die much earlier than they and their loved ones would have expected, often suddenly and without any warning. If you happen to die while still in your productive age and are the main provider of income for your family, your spouse and kids may suddenly find themselves in a very difficult situation, unable to pay the bills, unable to keep the kids in the preferred school, or unable to keep up with mortgage and other debt repayments. As you can imagine, financial difficulties can make an already very stressful period even worse.
Quick Access to Funds
A typical life insurance plan pays money to the beneficiaries, either as lump sum or regular income, very quickly. It is often the first meaningful source of funds, available before the complex succession procedures are finalized and before your family gets access to your bank accounts and other assets. It can also help pay funeral expenses and other unexpected costs which may arise in the first days and weeks.
Another benefit of life insurance is tax efficiency. The death benefits themselves are typically tax-free. More complex life insurance products also enable you to build a cash reserve or invest part of the premium in assets such as stocks, bonds or mutual funds and therefore can be a powerful way to defer or reduce taxes paid on your investments. Of course, tax issues are complex and your tax position will depend on your country of residence or domicile, the characteristics of your particular life insurance plan and other personal circumstances.
Life Insurance, Wills and Estate Planning
There are other tools to help your family after you die, minimize taxes and protect your legacy. If you are in a position where having a life insurance plan makes sense (i.e. you have significant assets, income and people depending on you), you should also have a Will and also consider other arrangements to make the transfer of your wealth to your spouse or kids as fast and smooth as possible and to make the related costs and taxes as small as possible.
That said, a life insurance plan must not be considered an alternative to these tools – it can complement them very effectively. You should always consider all your investments, insurance plans, retirement savings and estate planning arrangements together, rather than in isolation.