When Does Life Insurance Make Sense?


The following is an excerpt from TheStreet.com Ratings’ Consumer Guide to Term Life Insurance. TheStreet.com rates the financial strength of 680 life insurers and makes those ratings available at no charge.

Contrary to what many insurers will tell you, not everyone truly needs life insurance. In its purest form, life insurance is merely a form of financial protection in the event of your death. You sign a contract to pay premiums to an insurance company and in return, the company agrees to provide a specified amount of money (i.e. benefit) to whomever you designate (i.e. your beneficiaries), upon your passing.

This financial protection can be particularly comforting when it comes to providing:

  • protection for your family against financial hardship or to maintain their current standard of living.
  • cash to pay off mortgages, taxes, or other debts so your heirs are not left with them.
  • funds to pay funeral expenses.
  • a continuing income stream for your surviving family members.
  • an inheritance for your heirs.
  • a nest egg for future expenses like your children’s or grandchildren’s education.

As you can see, life insurance is most applicable when you have dependents or heirs that you want to provide for. On the other hand, there are plenty of situations when life insurance does not make sense. For instance…

  • If you are single and don’t have any dependents, you probably don’t need life insurance. A salesman may try to persuade you to purchase a policy with arguments such as, "The premiums are lower while you are young, so it makes sense to lock them in now," or "By purchasing a long-term policy now, you will not have to provide evidence of insurability later." Although both of these statements are true, odds are you’ll be paying premiums needlessly if you follow this line of reasoning. If you truly don’t need life insurance now, then why pay for it? And what are the chances that your health will take a significant turn for the worse before you reach the point when you do need life insurance? It’s your money, but if you want to hang onto as much of it as possible, don’t buy insurance before you can demonstrate a real need for it.
  • If you are retired and have no dependents, you probably don’t need life insurance. At this time in your life, you most likely don’t have large debts (like a big mortgage) or dependents relying on your income. If there is no one who will be financially harmed when you pass away, then why spend money on life insurance when you could be spending it on yourself or some other worthwhile cause? Plus, premiums for people over age 65 are very high and may even be unaffordable. An exception to this logic may apply if you are using life insurance as an estate planning tool to avoid taxes.
  • If your spouse has a high enough income and could maintain his or her standard of living without your contribution, then you probably don’t need life insurance. Life insurance should be purchased to replace the income or services you’re currently providing for your family. However, if your family would not be financially harmed by your death, then it doesn’t make sense to spend money on life insurance (unless done for estate planning reasons).
  • If you are considering a policy for a minor child, then he or she probably does not need life insurance unless you would need the money to cover basic funeral expenses. Undoubtedly the loss of a child would be terribly tragic. Financially speaking though, you would not experience a loss of income provided by the child. Therefore, life insurance does not make sense for minor children except as insurance against the cost of funeral expenses.

At the other end of the spectrum, if you have young children, a spouse, or other family members who are relying on your contribution to the household income in order to pay the bills, then you probably do need life insurance.

TheStreet.com Ratings issues financial strength ratings on each of the nation’s 8,600 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

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