Not everyone needs life insurance (but here are 6 times when you might)

Allworth co-founder Scott Hanson shares some of the most common reasons when life insurance might be necessary. 

If someone tries to tell you that everyone needs life insurance, they either aren’t being entirely truthful, or they are misinformed.

While there are always exceptions (some people just don’t feel comfortable unless every conceivable financial outcome is accounted for), a good “flyover appraisal” for whether you need life insurance would be to ask yourself the following question:

“If I were to pass away, would the people I love be hurt financially?”

The answer to that question usually evolves throughout your life.

Technically, life insurance is an agreement between the policy holder and the insurance company where in exchange for premiums, in the event the policy holder dies, the listed beneficiaries (typically, family, but it could be a business partner) receive a “death benefit.”

So, specifically, what are 6 of the most common scenarios where you might need life insurance?

• Your significant other depends on your income

This (and the following) are probably the two most common scenarios where life insurance may be an absolute necessity. Especially in partnerships where one person earns significantly more than the other, and the death of the higher earner would financially devastate the surviving partner.

• You have children who rely on your income

The tragedy of the death of a parent can be exponentially compounded when they have young (or dependent adult) children who are largely (or even 100%) reliant on your income to survive and pay expenses.

• When you have debt co-signers

I’ve seen more than a few loan co-signers financially devastated by the death of a loved one they were merely trying to help.

That’s because debts don’t simply vanish when the primary borrower passes away. In fact, spouses in states that recognize community property, and possibly even the people who are responsible for overseeing your estate, and who fail to comply with probate laws, are all potentially responsible for your debts if you die.   

• Your estate is large enough that your beneficiaries owe taxes

For 2022, the exemption amount for estate taxes is $12.06 million for singles, and $24.12 million for couples.

This means that estates that fall beneath those thresholds aren’t generally taxed.

But for people who have accumulated estates that are worth more than those amounts? 

The tables are complex and slightly progressive, but if your estate is worth more than $12.06 million, and you pass away, for 2022, the first $1 million is taxed at between 18% and 39%.

That’s a big bite out of what you are hoping to leave your heirs.

And after that? It gets worse.

In fact, for large estates, the tax rate jumps up to 40% after the first $1 million is taxed between that 18 and 38%.

If you have an estate that valuable, having life insurance to protect your heirs (and your hard-earned savings) is probably a good idea. (It almost goes without saying that you should speak to your estate planning attorney, your advisor, and your accountant before you make any decisions regarding life insurance and your estate.)

• You want a festive or lavish, party, funeral, or service

A traditional funeral with a viewing starts at around $8,000. If it’s your desire (or the desire of those who love you) to have a large celebration of life, just like weddings, when it comes to cost, the sky (and your imagination) is the limit.

If your goal is to go out with a bang, life insurance could be used to help cover the cost.

• You want to take care of the people who have helped build your success

For some people, work is life. If you’ve owned an enterprise that employs people, or you have partners that rely on you for their livelihood, life insurance that names them, or the business, as the beneficiary can be a terrific way to not only show your appreciation, but to also keep your passion going strong long after you are gone.

To be sure, life insurance is a difficult topic to discuss. It forces us to consider that the sun will in fact rise tomorrow even if we are no longer here to see it.  

Everyone’s situation is unique. Some people should have life insurance, and don’t. While many others carry significant policies but no longer need them. (For instance, they are retired or have saved exceptionally well, and their loved ones would not face any financial hardship in the event of their demise).

Life insurance is a financial decision, and so it’s best to view it as dispassionately as possible to try and take the emotion out of the equation.

Whether or not you need life insurance is a question that should be answered, not by a salesperson, but by a full-time fiduciary financial advisor.