If you are young and single, you probably don’t need to think about life insurance just yet. Even the Insurance Information Institute, an industry-backed group, says: “In most cases, if you have no dependents and have enough money to pay your final expenses, you don’t need any life insurance.”
But then you get married, buy a house, have a child — and you start to realize there are people who would suffer financially if you died. How do different life events affect your life insurance needs?
Marriage
If you die, your spouse will need at least enough money to cover funeral costs and any taxes and expenses associated with winding up your estate. This generally adds up to $15,000 or more, according to the Insurance Information Institute. Your spouse also may be depending on you to help pay the rent. Maybe you’re covering all the living costs while he or she finishes school. Make sure to designate your spouse as your beneficiary.
Buying a home
Now you have a mortgage that depends on your income. You may want to boost your insurance to help cover that cost.
Having a child
Children are expensive. If you died, your spouse would face the costs of child care, clothing, food, schooling and much more. If you are a single parent, or if both parents died, that burden would fall to a guardian.
As the Insurance Information Institute puts it: “You want to be sure the family has the resources to maintain the home and have all the opportunities you want them to if you are not there.”
Don’t name minor children as beneficiaries, the National Association of Insurance Commissioners warns. Rather, set up a trust or designate a custodian.
Divorce
In the event of divorce, you probably want to change your policy quickly so your ex is no longer your beneficiary. That said, if you’re depending on child support, you may want to stipulate as part of your divorce settlement that your spouse buy a life insurance policy specifically to cover the payments if he or she dies, the National Association of Insurance Commissioners advises. “You should be named as the owner and beneficiary of such a policy to prohibit your ex-spouse from changing the beneficiary name without your agreement,” the group suggests.
Getting a new job
A couple of factors come into play with a new job. For one thing, new jobs often pay more, and your family may quickly come to depend on that extra money. That means you’ll need to boost your life insurance policy to match. Also, were you depending on a policy through your former employer? You may be able to take that plan with you or replace it with one from your new workplace.
Paying off your mortgage
The end of your mortgage payments cuts your family’s living costs significantly. This may mean reducing your insurance coverage.
Retirement
Before punching out for the last time, check with your employer to see whether the company’s group policy is portable. You may be able to buy continued coverage without a medical exam.
Also, retirement is a time when many of us have fewer financial commitments, such as mortgage payments and young children, and we may have accumulated greater savings that would cover costs if we died. If your spouse dies and you remarry, you’ll want to update your beneficiaries, assuming you still carry life insurance.
Sometimes it makes sense to allow your term life policy to lapse when your income and expenses are more limited. Or you may want to consider switching to permanent life insurance, which can act as an investment vehicle.
Some seniors consider “final expense” policies, which typically have relatively small payouts of $10,000 or $25,000 to cover end-of-life costs. These policies may be sold as “guaranteed issue,” meaning that no medical exam is required, but that can add to their cost. Also, final expense policies typically won’t pay the full benefit if you die in the first two or three years of the policy, the National Association of Insurance Commissioners warns.
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