Here is a common scenario. A wife and husband both have retirement accounts through work. They probably contributed to them for different amounts of time, and one may be quite a bit larger than the other or they may roughly be the same size. Now in their mid-30s, they are starting to have a family and are getting established enough at work to really start concentrating on their personal financial planning. They meet with their advisor, who may tell them that they need to start saving more into their retirement plans. The advisor also pitches what seems like a large joint life insurance policy or two large policies, one for each spouse.
Is life insurance really necessary? And why does it have to be for so much money? Isn’t the money in the retirement accounts and social security enough to see one of the couples through retirement if the other passes away before their time? Learn why the advisor is probably giving very solid advice and when life insurance is necessary and when it isn’t. Here is the answer to the question of if you need life insurance if you already have an IRA or 401(k) retirement account.
How Much Money You Need
You may have noticed the rising costs of housing, food, and education. If you have children, it is getting harder and harder for a single parent to provide for their kids, put them through college, and live a comfortable life in the process. The point is that you probably need a lot more money than you think. The cost of a college education has gone up about 10% to 15% a year for the last decade.
When figuring out how much of a shortfall your family would have if one spouse lost their jobs, you can use our life insurance needs calculator for a simple estimation. If you want to calculate your need yourself, the number you are trying to reach is the amount that would pay off the mortgage, provide for all living expenses, and provide for a comfortable retirement, minus the amount of money the other spouse is likely to earn for the remainder of their life (including social security) and the amount you already have saved. Keep in mind that daycare is usually a new expense for a single parent, or a single parent may need to cut back at hours at work, choose a less demanding job, or even ideally stay at home full time to raise the family.
Don’t be surprised if you get a much higher number than you expected. It is not common for a middle-class household to need a million dollars in life insurance coverage, or even more. If you have large balances in your combined retirement accounts, many people can get by with a little less life insurance such as $500,000, but it depends on your personal situation. A retirement account from a deceased spouse always goes to the other spouse as a part of the estate.
Real estate alone is extremely expensive, especially in the Northeast US and along the coasts. The median home price in some states is even approaching half a million dollars. If you have an unexpected death in your family, the last thing you want is to continue to pay a mortgage. Life insurance should at the very least provide for the entire cost of housing for the family, and don’t forget property taxes!
Social Security may not be There
You probably have heard that social security is “broke” or underfunded. It is somewhat true. The reserves are projected to be depleted by 2035 if nothing changes. Assuming something does change, either benefits will need to be cut or taxes will need to be increased. Both cases will require extra money.
If you want to make sure that your family is secure, and your spouse is secure in retirement, they probably can not rely on social security. Who knows what ultimately will happen, but benefits will probably be reduced. If you combine the shortfall with longer and longer life expectancy, your spouse may need money in retirement for a long time.
Life Insurance is Immune from Market Volatility
Keep in mind that the stock market has historically gone through violent swings. While it tends to rise given a long enough time frame, your life will not necessarily work in lockstep with the timing of the market. You may need to take withdrawals when the market is down because your life dictates it. Also if you read the warnings on any stock market prospectuses, past performance does not guarantee future results. In other words, the stock market may not always go up.
If you want to make sure your family has money, you may not want to depend on the stock market to provide it. Life insurance guarantees protection and many of our nations largest companies have been in business for over 150 years!
Whole life insurance can itself be used as an investment. Paying dividends and growing your cash value over time with a whole life policy is a much more stable way to build money than a stock investment. While the expected return is ultimately higher with money invested in the market, there are no guarantees, whereas life insurance does have minimum cash value growth guarantees.
Life Insurance can Pass Down Wealth Tax-Free
An investment account such as a 401(k) is considered a taxable part of an estate (to the extent that the estate is taxable). If your plan is to leave money to your children you need to consider the most tax efficient way to do so.
Life insurance is a great way to pass down money to the next generation while avoiding the estate tax. Even if only a tiny amount of premium has been paid, and the death benefit is a large sum, it is not generally taxed if your beneficiaries are properly named. To get the most amount of money to your kids, life insurance is usually the best answer.
Term Life Insurance is Cheap Extra Protection
Even if you think that you have enough in savings between your retirement accounts, savings accounts, and other assets, life insurance can still be a good idea. A term life insurance policy is extremely inexpensive. Many people can get each $100,000 of coverage for a few dollars a month, depending upon their health and age. Why take chances of leaving your heir’s short money in a world of rising expenses and difficulties? Protect your spouse’s retirement and your children’s futures easily and inexpensively. If you want to know how affordable you can get coverage, you can always get quotes here at Life Ant or from your financial advisor.