The need for life insurance, in the traditional sense, is an income earner with people, usually family members, who are dependent on that income. If the income earner dies, so doe the income, and hence the need for life insurance.
There are other instances where the need is not so clear-cut, or even no discernible need, where it is wise to procure life insurance. One that I’ve written about before is recent college graduates still living at home. The premium at age 22 is approximately 25-30% less than the premium at age 30, depending on the product and underwriting classification.
So in these cases, while there is no current need in the traditional sense, it certainly makes economic sense to lock in the lowest rate in anticipation of future need. It also negates the risk that a decline in health would have on the premium.
I started thinking about this because of a widow I recently met. Her husband was an executive with a large national corporation. His significant income allowed her to stay home with their two children and allowed them to graduate college with no debt. It also allowed him to accumulate close to seven figures in his 401(k).
Unfortunately, he died at age 63 before he retired. Between his pension, social security and 401(k), his widow wouldn’t have to worry about finances. But is was the life insurance that really made the difference. In addition to his group term, he has some personal policies that he had bought when they were just starting out and when the children came along.
Now a case can be made that there was no need for life insurance in his case. I’m sure some financials advisors would say he should have cashed in his policies and invested the proceeds. If he needed the cash, that’s one thing. Otherwise, it is terrible advice, in my opinion.
But because he kept the policies, the widow now has options that she wouldn’t otherwise have had. For on, it allowed her to rollover his 401(k) and not touch it, allowing it to compound free of taxation.
She will have to begin taking the required minimum distributions this year, which will provide her with more options, as she doesn’t need the money to support her lifestyle.
So traditional “need” is one thing. But there are many cases where there is no traditional need that it makes damn good sense to have life insurance.