The main question you have to ask yourself is, “If I passed away today would anyone financially struggle?“
If you can answer Yes to this question, then most likely you’ll need life insurance. If there are people in your life that are dependent upon you financially than buying life insurance is the smart thing to do. The people who receive this death benefit which could be your spouse or children, could then use this tax-free money to cover their financial needs like paying off big debts or expenses in order to maintain their same style of living. Life insurance isn’t intended to make anyone rich, we just want to have a piece of mind that our family will be OK financially if something were to happen.
Everyone’s financial situation is different and not everyone needs or wants to be covered. Here are some of the more common reasons why people buy life insurance.
- Replacing Income. Most households rely on two incomes and if one person passed then more than likely there would be a financial hardship. If one person (bread-winner) supports the family than it’s usually a good idea to buy life insurance since that family depends on that person’s income.
- Key-Person Insurance for Businesses. This is a life insurance policy that a company buys on the life of an executive or key member in a business where this person’s death would be devastating to the future of the company. For small businesses, the key person might be the owner or founder. This is usually 1-3x annual revenue the key employee is responsible for.
- Buy-Sell Agreement. The is a life insurance policy designed to protect a business, the owners and their heirs, if one of the owners were to pass away. It’s also known as a buyout agreement. This allows the business to continue by buying out the deceased owner’s share from their heirs. Typically it’s 1 to 1.5X the current value of the business.
- Diversify Your Investment Portfolio for Retirement. Indexed Universal Life Insurance (IULs) policies have a cash value component that grows tax-free. Usually, this is at a fixed or index rate, which offers a very conservative return. When structured correctly this could be a great supplement to your investment portfolio.
- Cover Estate Taxes. If you anticipate leaving substantial assets to your heirs, they could face a large estate tax burden. Beneficiaries of your life insurance policy can use the non-taxable death benefit to pay any estate taxes. We recommend consulting with your estate-planning attorney and CPA to calculate your tax liability.
- Maximize Your Pension. This retirement strategy usually has two options for couples to look into. One being opting for the highest possible annuity payout for the retirees lifetime while obtaining life insurance to provide income for the surviving spouse. Option two, is to elect the joint/survivor benefit where this will reduce the amount of the benefit the retiree receives during his or her lifetime, however, it will guarantee their spouse 50% or more of their pension benefit after passing, and for as long as the surviving spouse lives as well. This is usually very expensive compared to the cost of life insurance and worth looking into.
- Leaving a Legacy. Plain and simple some people want to buy life insurance to potentially leave a legacy for their loved ones.
Out of all the reasons to buy life insurance above, the one we see most often is #1, people using life insurance to replace lost income in the event of death.
Of course if you have any questions on any of the above, please feel free to contact us directly.