The Wealth Spa

Do You Need Life Insurance?

Posted on 03. Nov, 2008 by Elizabeth Potts Weinstein in Finance

Maybe not.  But if you do need life insurance, you probably need more.

I don’t use a rule of thumb, like you need x dollars times your income, or a rule of situation, like if you have a spouse or kids you need life insurance, but if you are single, you don’t.  

Here’s my rule:  If you died yesterday, would all your goals be paid for with the money you left behind?  Or would your goals be moot?

Here’s how it works.  

If you died yesterday and you are single with no dependents, many of your goals — retirement, buying a house — are moot.  But, you may have some goals that need funding, like college savings for your niece, donations to your favorite charity, or an orderly transition for your small business.  If those goals are paid for with the money left over in your estate (after your debts and final expenses are paid), then you don’t need life insurance.

If you have a spouse/partner and/or kids, then you have some goals that outlive you.  You probably want your family to continue their current lifestyle, the kids to go to college, and your spouse/partner to be able to retire.  So the question is, would they be able to do those things with the money you leave behind?  If not, then you need life insurance to make up for the difference.

If you are the stay-at-home spouse, you may think you don’t need life insurance because you don’t have income to replace.  Wrong!  You are providing help and services for your family that would need to be done, and your spouse may need to hire a nanny, a personal assistant, and/or a housekeeper to help keep things moving.  Also, the spouse-left-behind may need to take time off work to grieve and spend time with kids — and without a huge Emergency Fund, you may need life insurance to pay for these additional expenses.   

But there is one time in life where you may no longer need life insurance — the day you are living off your passive investments.  If your living expenses are paid for by income from your life savings, retirement accounts, and passive rental income, then you may not need life insurance … since if you died yesterday, the income would still be there for your spouse & dependents.

The Wealth Spa Minute:  Review your goals.  Would they still exist if you were gone?  Would they be paid for if you were gone?  Review your current life insurance policies to see if you need less insurance, or more. 

Photo courtesy of SuziJane on Flickr.  

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Tags: emergency fund, estate, Goal, goals, insurance, life insurance, lifestyle, living expenses, passive investments