What Needs Can Life Insurance Fulfill?
When an individual dies, life insurance becomes an instant source of money. It can provide immediate cash to satisfy needs created as a result of the person’s death, and it can continue to provide for survivors’ needs for years to come.
From an immediate cash needs standpoint, life insurance can pay final expenses—medical and funeral bills, estate administration costs and taxes, for example—arising from a wage earner’s death.
It can also pay off a mortgage, retire any outstanding consumer debts such as car loans and credit cards, and establish emergency funds and children’s education funds.
Life insurance can also help replace a wage earner’s income for the survivors—regular, continuing income to pay for day-today living expenses including food, clothing, transportation, school expenses, medical and dental checkups, entertainment, gifts, and incidentals. It can make monthly mortgage or rental payments if there’s no mortgage payoff at death.
The amounts needed for any and all of these uses can vary across geographic areas. They also change depending on the affected people’s income level, accustomed lifestyle and personal preferences.
“How much life insurance?” is a question every person must answer individually, based upon their own circumstances:
- What debts will I leave for my family to pay?
- How much will my final expenses (medical expenses, hospital bills, funeral costs, etc.) be?
- Is there a mortgage to pay off if I die?
- Do I want to provide funds for continuing mortgage or rent payments?
- Do I want to provide an education fund for my children?
- Should I use the cash value available in a permanent insurance policy as a means to accumulate an emergency fund?
- What ongoing income needs will my family have?
- Where’s the money for all this going to come from?
- Will Social Security help if I die prematurely?
- How much life insurance do I already have?
- Is it term or permanent insurance?
- Finding an answer to the question begins with identifying the various cash and income needs resulting from a wage earner’s death, and then estimating how much it would take to meet them.
- An initial step is to figure how much immediate cash it will take to pay final expenses arising from that death: medical bills, funeral costs, and estate administration costs.
- Cash needs might also include funds to pay off a home mortgage; to retire any outstanding debts such as car loans, credit card balances and other consumer debt; and to pay any federal income, estate, and state death taxes that are due at the wage earner’s death.
- Typically, there’s also a need to establish emergency funds, and maybe education funds.
- Business owners probably have additional cash needs.
ONGOING Income Needs…
- In addition to immediate cash needs, families invariably need a source of regular income for a number of uses.
- Money from somewhere will be needed to replace the deceased’s income that paid day-to-day living expenses:mortgage, food, clothing, transportation, school expenses, medical and dental checkups, entertainment, gifts, utilities, home and car repairs, and more.