Do you really need life insurance?
Thursday, July 07, 2011
Sometimes it stinks to be the grown-up. Case in point: life insurance.
If there's anything worse than thinking about your own death, it's doing math problems about it. Bring up the topic of life insurance with a young parent and you're promptly dismissed with one of two responses-blind confidence or abject guilt. Whether they own a policy on themselves or not, parents seem to embrace the idea that they should.
Parents of young children may feel better if they have a policy, but life insurance is not appropriate or necessary for every family. The decision to buy life insurance doesn't come down to numbers alone, but understanding the value of income and assets goes a long way toward making the right choice.
Imagine a future without you
The idea behind life insurance is that when others depend on your earning capacity, you want to enable them to continue their standard of living when you die.
Add up all your family's expenses, and don't forget the replacement cost of child care if one parent stays at home to care for very young children. Once you know how much your family needs on an ongoing basis, look at sources of assets and income, such as:
- Any source of inheritance
- Employer-sponsored life insurance benefits
- 401(k) accounts, pensions and Social Security benefits
- Earning ability of surviving spouse or other caretakers
- Available support from siblings, grandparents or other extended family
Consider how long it would take for your children and the surviving parent to become self-sufficient. To make the best choice, you will want to conduct a detailed inventory of your finances and lifestyle. For that, an objective professional opinion can be invaluable-even if you have to pay for the advice. (Know that if you're talking to an insurance agent, you are likely to be hit with an emotional appeal, and as with most money matters, feelings only cloud the real issues at stake.)
What expense to consider
It is natural to think of all the years ahead for your young family, such as how would they maintain the mortgage and cover the cost of a college education. While long-term needs are important, think about the short-term expenses, too.
Depending on your circumstances, a policy that covers short-term expenses may be all you need, or you might want to provide for your family for years to come.
The life insurance decision can be complicated. If a policy allows you to believe that everything will be just fine when you're gone and the expense of the premiums doesn't adversely affect your lifestyle, the answer is easy. On the other hand, some can't afford the peace of mind bought by life insurance, and many don't need it.
Even when the calculations get messy, learning about your life insurance options is worthy of your time and attention. You are the grown-up, after all.This article appeared in Chicago's Favorite Kids Docs 2011, a Chicago Parent special section.