Most people know that life insurance is an important financial security tool, and for a good reason – it can save your family financially if tragedy strikes. Basically, you pay a set fee for an agreed-upon period of time, and if you die during that time, then the insurance company will give your family a set amount of money.
But when you do need life insurance?
The simple answer is that you should buy life insurance if the death of the insured would cause a financial hardship. Common trigger events for buying life insurance include buying a home with a mortgage or the birth of a child. In fact, when each of these events happened to my husband and me, we both acquired a new life insurance policy. With the home purchase, we wanted to ensure that the surviving spouse would be able to pay off the mortgage plus have some breathing room, and with the birth of each child, we wanted to ensure that the kids and surviving spouse would have enough money to pay off the mortgage, pay for educational expenses, and have additional funds for unforeseen expenses.
Other times you might want life insurance include protecting a business partner who might need funds to keep the business going in the event of your death, if you acquire a dependent such as an aging parent or incompetent sibling, and so on. The question you need to ask is, “Would my death cause a financial hardship on someone I care about?” If the answer is yes, you should consider buying a life insurance policy to relieve that financial hardship.
On the other hand, you don’t need life insurance if you don’t have any financial dependents. For instance, if you’re single and you buy a home with a mortgage, you don’t necessarily need to buy life insurance to pay it off in the event of your death. After all, these is no surviving spouse who might not be able to make the mortgage payment without the income of the deceased spouse. In the case of the unmarried homeowner, the estate can sell the property to pay off the mortgage, and any profit/equity will revert to the estate for distribution.
*Previously: How much life insurance do you need?