Life insurance has been part of the estate planning process in the United States for a very long time. Although it isn’t necessary for life insurance to be a part of every individual’s estate plan, it often can be useful, particularly for parents who have young children as well as those who are supporting a disabled child or adult or their spouse.
LIFE INSURANCE NOT ONLY HELPS TO SUPPORT
Life insurance not only helps with supporting dependents, but at death can also help to provide survivors with immediate cash. Insurance proceeds are a very useful source of money to help pay the estate or income taxes, funeral expenses and debts of the deceased.
Individuals who don’t have any dependents with financial issues or minor children might not need to have life insurance. You will find questions below to ask yourself that can help you evaluate what your life insurance needs are. If you do decide to buy life insurance, you need to know exactly what your reasons are for purchasing it and select the best kind of policy to meet your needs. You of course will also not want to purchase any than what you really need.
Your Family’s Long-Term Needs
In order to determine whether buying insurance makes good sense for you in order to provide family members with financial assistance over the long term, the following questions should be considered:
How many family members or other individuals are dependent on your earnings?
If your answer is “none,” then most likely you don’t need to buy life insurance.
What amount of money will your dependents need to have for their living expenses?
One method you can use for determining this amount is to look at how much earned income you provide on a regular basis to your dependents. From this amount, subtract the value of the property they would be inheriting from you along with any amounts available from private insurance or public sources that provide coverage already. Social Security dependents and survivors benefits will most likely be available, and you might also be covered by management or union pensions, or by a group life insurance plan. Other likely income sources should also be subtracted, such as help from grandparents who might be fairly affluent who could help provide support for your children in the event of a disaster.
What amount of time would be needed for your dependents to become self-sufficient?
If your children are nearly through with college, they might not need a lot of extra income. However, if they are still young, also keep in mind that a dependent spouses who is currently taking care of young children usually will at some point be able to return to work, and some kids might get partial scholarships at least.
After you have completed this exercise, you might determine that your dependent might not need much income from life insurance. However if you do have young children then it might make sense for you to purchase life insurance to meet those needs.
Your Family’s Short-Term Needs
Now, you need to determine whether or not you need to have life insurance for your family’s short-term needs:
Ask yourself what assets are available for taking care of the immediate needs of your dependents. You might want to leave money in a pay-on-death or joint bank account, or put marketable stocks within a joint tenancy or have them registered on a beneficiary (transfer on death) form.
How long will it take for your property to get handed over to your inheritors after you die?
If a majority of property will avoid going through probate, then usually there isn’t much need to have insurance to pay for short-term expenses unless you don’t have any securities, bank accounts or other types of cash assets. However, if most of your property will be transferred by a will, them it could be tied up for months in probate, then your family or other inheritors might need immediate cash that can be provided by insurance. Although usually a probate court will quickly authorize a family allowance or enable a spouse or another inheritor to access funds from an estate, it still can be useful to have some insurance proceeds.
After your death is your estate going to owe substantial taxes and debts?
Financial advisers and lawyers refer to cash as well as assets that can be converted quickly into cash “liquid.” If most of the assets in your estate are “non-liquid” (jewelry, share in small business, collectibles, real estate(, there could be significant financial losses suffered if those assets had to be quickly sold to raise money to pay bills, versus what they could be sold for at a later date if there was enough liquid money from either insurance or other types of sources for meeting all the immediate expenses. If your estate has significant funds in marketable securities or bank accounts then you won’t need to have insurance to met short-term needs. Fortunately, federal estate taxes do not need to be paid until nine months following death, so cash will not need to be raised immediately to pay for them.