Question

Is life insurance a necessity, or is it a luxury? What considerations should an individual evaluate before purchasing life insurance? How might these considerations change when spouses and children are brought into the analysis? Please include examples within your response.

Answer 1

NECESSITY VS LUXURY

As we retire, life insurance may no longer be a necessity but it may be a nice luxury. If our goal is to leave an inheritance to our loved ones or a cash donation to a favorite charity, we may wish to consider life insurance.

As long as we pay our premiums in a timely manner, life insurance will provide liquidity when we heirs need it. It allows us to pass an inheritance of real estate to multiple heirs without forcing them to sell the property at less than full market value.

Consideration

The first five things to consider.

1. Decide how long you need coverage.
Life insurance is designed to either last a certain period of time (called term life) or a lifetime (including whole life and universal life). If you only need insurance for a specific period of time (say, when your kids are growing up or for the length of your mortgage), then consider term. If, however, you need life insurance for as long as you live (for things like burial expenses or income replacement for a spouse), consider permanent coverage.

2. Calculate how much life insurance you need.
One way to determine the costs you’ll leave behind is through the “DIME” method. DIME stands for:

D - Debt (mortgage, private student loans, car loans, credit cards, etc.)

I - Income replacement (Consider the life expectancy of your spouse, dependents or anyone who depends on your income. Do you want to replace your income for the rest of their lives?)

M - Mortality (burial wishes and costs)

E - Education (Do you want to fund education expenses for your dependents? What about childcare? If you have children in daycare, do you want your policy to pay for their remaining years in daycare?)

3. Think about other objectives.
Some permanent life insurance policies can be used as savings. Permanent life insurance policies are lifelong and have cash value that’s meant to increase over time. These permanent policies contain a death benefit (or face amount), which is the amount paid at the time of death, and a cash value that grows over time on a tax-deferred basis, similar to retirement or tuition savings plans. It’s good to know the ways you can use life insurance in your financial portfolio.

4. Name a beneficiary.
Your life insurance beneficiary is the person or entity who will receive the proceeds of your life insurance policy. When choosing a beneficiary, avoid naming a minor child (children may not be able to receive funds) or your estate (it could have tax implications). If the policy is to benefit your business, you may want to have a formal plan in place for how the proceeds should be used. Explore your best options for choosing a beneficiary by speaking with your independent agent.

5. Talk with a trusted advisor.
When you’re ready to purchase life insurance, you need someone with your best interests in mind who can guide you through the process. Talk to your local independent Grange agent or find an independent Grange Life insurance agent.

Having a baby or spouse - life insurance and what to consider

Having a baby makes life more complicated in many ways. Two major considerations you’ll need to quickly work through are how much life insurance you need and how to update your will.

First, having a baby is expensive. Raising a child through adulthood and putting them through college, if you decide to, can easily cost hundreds of thousands of dollars. If you died tomorrow, your spouse would be left to foot that bill alone without your income. For this reason, it typically makes sense to buy more life insurance to cover these new expenses just in case you pass away before your child is fully grown.

When you have a child, you may once again decide to change how you want to leave your assets in your will. While your spouse will likely still be the primary beneficiary of your estate, you may want to add your child as a secondary beneficiary.

More importantly, you’ll want to state who you want your child’s guardian to be should you both unexpectedly pass away. Without this important information in your will or nomination of guardian form, the courts may decide who to appoint as guardian.

It’s never required for your children to have life insurance but parents or grandparents will often purchase coverage in order to:

• Cover costs associated with the child passing away
• Ensure insurability of the child later in life
• Give the child the gift of an investment with a fixed rate of growth

Example - LIC jeevan aarogya policy in India is a good example of life insurance which includes children and spouse in the policy.