FA Center: This is why you should buy life insurance — even if you’re single
If you’re single or childless — or both — there’s a chance you might not have given life insurance much thought. But there are several reasons you might want to think again.
The first might be the most obvious: funeral expenses. A traditional funeral can cost more than $ 10,000, so owning a small policy to pay those expenses, rather than leaving them to your heirs, may be a good idea. (If you have already purchased a prepaid funeral plan that allows you to fund funeral expenses before death, most of your expenses will be covered. However, expenses from a protracted medical illness wouldn’t be, so a small life insurance policy could still be in order.)
There are other uses for life insurance, however.
You can use it to retire debt. State laws vary, but assets owned at death are generally reduced by outstanding liabilities before they’re passed on to heirs. Consequently, an insurance policy with a death benefit equal to the current amount owed — it could include such obligations as mortgage, an auto lease or loan, or credit card debts — can help ensure that your entire estate can pass on to your loved ones.
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An important exception to this need is student loan debt. If your student loan is federally sponsored, it can be discharged upon death. Additionally, Plus loans (Parent Loans for Undergraduate Students) are forgiven when the student or parent dies. (Keep in mind that the amount forgiven is considered taxable income upon the death of the student.)
Private loans, however, are generally not forgiven upon death and would need to be included when calculating the amount of life insurance to buy.
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You can get access to “accelerated benefits.” As a single person, you most likely only have your own personal resources to access in the event of a major illness or injury. Most life insurance policies sold today include a provision that accelerates a large percentage of the death benefit during your lifetime upon the diagnosis of a terminal condition.
The policy typically defines a terminal condition as one which is expected to result in death within a specified period, sometimes 12 months. These “living benefits” are extremely helpful in paying the medical costs associated with a terminal illness or injury.
The accelerated benefit may even afford access to lifesaving procedures or medications that your medical insurance will not cover, including those that are declined due to their cost, experimental procedures or medications, or those only offered overseas.
These living benefits, however, should not be purchased in lieu of disability insurance or long-term care insurance. Those policies fill different needs.
You can guarantee insurability later in life. Life insurance is usually medically underwritten, which means that the insurance company will ask about your medical history. Some conditions can increase your premiums or lead an insurer to decline to issue a policy, so purchasing a policy when you’re younger and healthier could lock in access to coverage later even if medical complications arise — which can be valuable even if your family or relationship status changes.
Additionally, since older applicants are normally charged higher premiums than younger insureds, you can lock in lower premiums by purchasing a policy when you are younger. Since you will never be younger than you are right now, the premiums will never be lower. (A good time to purchase a policy is after an increase in your income, when you can utilize new money that hasn’t been allocated to other expenses.)
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Finally, a note about employer-offered group life insurance. Many large employers offer insurance benefits of one or two times the employee’s income, while smaller companies might provide flat amounts, such as $ 10,000 or $ 25,000. (In some cases, you can increase your coverage through medical underwriting, though you should shop for other offers in that case.) Depending on your needs, this might be sufficient for you.
But there are some caveats. Group insurance generally ends when you leave the employer, which could be problematic should you be uninsurable at that time. Additionally, group life insurance premiums are generally higher than comparable options available on the open market, and they increase every five years, which can make them very expensive at older ages.
Clark D. Randall, CFP, is a financial planner and owner of Financial Enlightenment, a comprehensive wealth management firm.