How Do Life Events Effect My Life Insurance Needs?
A new baby. Marriage. A new home. Retiring. Sending the kids to college. These are the events that define us and alter our lives. They are also the events that require us to change our insurance plans to protect those we may unexpectedly leave behind.
For insights into how your life insurance needs evolve as you you arrive at these life events, see below.
As a single man or woman without dependents your life insurance needs should not be extensive. Besides your funeral, your only other considerations could be outstanding loans to family or general wishes to leave money to designated individuals.
Now that you are married, you have a spouse, and possibly children, who are dependent on you for financial support. If you die suddenly without life insurance, your family may have a tough time meeting their current and future financial needs. For example, will your spouse be able to pay your funeral expenses, make the mortgage payments, continue servicing existing debt and pay for your child's fall semester at college? Will your family be forced to move to a less expensive residence, or will your spouse be forced to enroll your two young children in day care in order to work full-time when you are gone? If anyone in your family will suffer an economic loss or hardship as the result of your death, then you need sufficient life insurance coverage to insure they are taken care of.
Having a child will increase your need for life insurance coverage. If one partner dies, the other may be left with many unresolved financial issues, including funeral expenses, an unpaid mortgage, outstanding loans, financial support of the children, and college education funding. If you're a single parent, you'll most certainly want to leave some financial support for your child.
Whether you're adopting or expecting, life insurance is important, and you need to know how much coverage you will need now that you have additional family to support. Why is life insurance important when a child is born or adopted? When a child enters your life, the purpose of life insurance becomes clear. You now have someone else who is dependent on you financially. If you were to die prematurely, your child's future could be significantly hampered by your loss.
Generally, the goal is to provide a safe and secure future for the ones who are left behind. Whether you're adopting or expecting, an addition to your family will definitely increase your need for life insurance coverage because of the increased expenses and the potential changes in your financial goals and priorities.
If you have a wife and children, you will most definately want to opt for more life insurance. Should something ever happen to you, your children will undoubtedly be your spouse's biggest expense. Your spouse will have to provide your children with food, clothing, toys, braces and perhaps a college education. You want to make sure that you have enough life insurance to cover these costs and maintain an acceptable standard of living. Naturally, the more children you have, the more expensive it will be and the more life insurance you will need.
Your spouse should be named as the beneficiary of your life insurance policy in order to receive payment if you die. Even if your will says that your spouse is the beneficiary of the policy, it will not take precedent over the policy's beneficiary designation. If you have children, you may want to include them as well. For example, you can name your spouse as primary beneficiary and your children as secondary beneficiaries. A secondary beneficiary is the person who will receive payment if the primary beneficiary dies before you. Naming both your spouse and your children as beneficiaries can make it easier for your children to collect if something happens to you and your spouse at the same time (e.g., if both of you die in a plane crash).
However, keep in mind that courts will not allow minor children to directly receive the proceeds of a life insurance policy. You will need to set up a trust to receive any payment for the benefit of your minor children and name a trustee to manage the trust for the children.
If You Already Have Life Insurance
If you already own a life insurance policy when you get married, you should do the following:
- Review the beneficiary designation (e.g., you may want to name your spouse as the beneficiary)
- Review the adequacy of your coverage (e.g., depending on your situation, you may need more coverage than you did when you were single)
At retirement, your lifestyle changes. Your cash needs will likely change (or shift) as well. You may now be in a lower income tax bracket. You may find that you spend less on transportation and clothing, or more on vacations and greens fees. Your existing life insurance coverage was calculated based on conditions before your retirement and may have included:
* Income replacement
* Mortgage on your primary residence
* Children's education fund
* Fulfillment of retirement cash needs
* Estate planning goals
Retirement is a good time to reassess your life insurance needs and existing coverage to make sure they accurately reflect your new stage in life. You may no longer be concerned with replacing an income stream that no longer exists, coverage for a home mortgage that has been paid off, or providing educational funds for children who are now finished with school and on their own. You may be more focused on providing for your grandchildren (or great-grandchildren), which may affect the choices you make about your life insurance coverage while in retirement. If you will be leaving a large estate when you die, your heirs may be stuck paying a hefty estate tax bill.
You may have existing life insurance coverage from more than one source, which could include:
Employer-Sponsored Group Life Insurance
Life insurance coverage under your previous employer's group plan may terminate at your retirement. Some plans offer a buyout option, where you can continue the coverage by paying the premiums yourself. Check with your company's benefits director.
Employer-Sponsored Split Dollar Agreement
If you and your employer engaged in a split dollar arrangement, the agreement between you and the company should specify the treatment of the policy at your retirement. There are many different ways to structure split dollar life insurance agreements, so your options will depend on how your plan was initially structured. Check your agreement, and consult your company's benefits director.
Individual Cash Value Life Insurance
You may have bought cash value life insurance as part of your overall retirement plan. If you plan to use the cash values as part of your income during retirement, you should check on your cash value balances and the tax consequences related to accessing your cash values. Weigh the tax effect of accessing different sources of retirement income to maximize your savings and minimize your taxes.
Individual Term Life Insurance
You may own term life insurance. Your policy will indicate the age at which coverage ends. You may be faced with a decision whether to continue the coverage.
You should review your beneficiary designations on your insurance policies as well as any employer-sponsored retirement plans, annuities, or IRAs. This is something you may want to do periodically, especially if your extended family is growing and you are naming grandchildren (or great-grandchildren) as beneficiaries.