Do Single People Need Life Insurance?
Think of life insurance not an expense but an asset that you leave as a gift to your loved ones.
Question: I’m 30 years old, single, with three siblings, two of them have jobs and one in college. My parents are retired and have a small apartment business. Is it really necessary to get life insurance now? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook
Answer: It looks like something in you is telling you to buy life insurance and that you are just looking for an added justification.
Well, one of the reasons for buying life insurance is to protect the income that your family is relying on should you be called from this life early. But as you said, you do not have your own family yet. So, what is the point of buying life insurance now, right?
Well, the other reason is because the younger the age of the policyholder, the more affordable are the insurance premiums. Why? This is because the chances of passing away is lower with the young ones than with the “young once.” Insuring an older person will be more risky for the life insurance company, which will then require higher premiums to compensate for the higher risk.
“And who will be my beneficiaries if I get life insurance now?” you might ask.
Well, why not make your family members your revocable beneficiaries. For as long as you don’t make any changes to your life insurance policy, your revocable beneficiaries will be deemed irrevocable beneficiaries once you are taken from this life. That means that your beneficiaries’ claims against your life insurance policy will be exempt from estate tax.
So, why not make your beneficiaries irrevocable to begin with? Well, when you have your own family later, you have the option of using the same policy and switching out your siblings and parents in favor of your own family members. If you do, you can then designate your own family members as irrevocable beneficiaries.
You may also be wondering how much of life insurance coverage you need to be buying. There is a multitude of ways to arrive at this amount from simple rules of thumb to detailed forecasting of the funding needed for your beneficiaries’ lifestyle when you are gone.
One rule of thumb is to see how long in years your loved ones will need to financially bounce back from losing your income. Once you know that, simply multiply the number of years to your annual income to arrive at the life insurance coverage you will need to buy. Do not buy coverage to support your family for the rest of their life. That strategy does not only promote complacency among your beneficiaries but is also very expensive.
A detailed computation would include an estimate of the expenses your family will likely incur upon your passing. These would include likely hospital expenses leading to your untimely death, burial expenses, estate taxes and debt liquidation, to name a few. (Do not forget the juice and snacks to be served during your wake.) You will need to add to these expenses the amounts your family will need to survive for a number of years. These will cover children’s education, spouse’s retraining to join the workforce, daily living expenses and even paying for their own life insurance premiums. To be more realistic, you will need to inflate these expenses during the years of support.
Finally, subtract from the sum above the assets that your family can readily liquidate at the time you are called from this world, income streams you will leave them and any existing life insurance coverage to arrive at your capital gap. A positive capital gap indicates the additional life insurance coverage you will need to acquire.
Bear in mind that the foregoing computation is not complete. You will really need to sit down with a financial planner to objectively find out how much life insurance coverage you will need to get. So, what are you waiting for? Talk to a financial planner today.
And do you know the secret to wanting to buy life insurance? Think of life insurance not an expense but an asset that you leave as a gift to your loved ones.
Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is best selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.
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