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checked threads before asking: 1 2 3

I have been so focused on running away of debt, that I haven't thought on future events. I am trying to decide when do I know that I need life insurance?

My brother just called me and told me he got a policy. I tried to convince him that spending money towards insurance makes no sense if you have high interest debts. Is this a good argument, or I am just completely missing the point?

19

Here's an easy 2 question test:

(1) Is there anyone who relies on your income for their general welfare?
(2) Is it worth the premium amount to you to make sure they aren't left out in the cold?

If you can answer yes to both questions, buy (term) life insurance.

  • Why term and no Whole? Whole - as I understand it, will let you save a portion of the premium. – Geo Jun 5 '11 at 23:43
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    Whole life is more expensive and doesn't make as much sense unless you are trying to use it as an investment, which I don't recommend. Term is cheaper and is more closely aligned with your goal to protect those who depend on your income. Likely there is a window of time where they will need that protection. When you are 80, for example, your kids will likely have their own means and not depend on your income. – JohnFx Jun 6 '11 at 2:19
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    See also money.stackexchange.com/questions/2297/… on term vs. whole life. – Havoc P Jun 8 '11 at 0:30
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It boils down to this: Who, or what, would you want to take care of financially if you were to die tomorrow?

That's why you need life insurance.

I'm pretty sure that your creditors would line up to receive payment from the life insurance check, so that's part of figuring out how much coverage you should have.

The life insurance premiums are another monthly payment, of course, but every day there is a small chance that you could die. Insuring against that small chance vs. paying down your debt faster is a decision that needs to be made, and you (or your brother) are the ones that will make it.

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    If debts are in your name, creditors should receive payment out of the estate. A life insurance check should go directly to your beneficiary and not to your estate. Creditors shouldn't see a penny of it. – bstpierre Jun 5 '11 at 12:28
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    @bstpierre - it depends. Who owned the policy? If I die, and I was the policy owner, the proceeds still pass through my estate, subject to estate tax and due to probate, to creditors. The right way to own insurance is through a trust or for the beneficiaries to be the policy owners. – JoeTaxpayer Jun 6 '11 at 0:46
  • @JoeTaxpayer - is that a state-by-state law? I thought that if, eg, my son was the beneficiary, then it bypasses the "estate" – warren Nov 7 '12 at 18:51
  • @JoeTaxpayer A late response (the question has had a new answer and jumped to the top of the list): my answer to a question about inheritance of an insurance policy may help. Generally, nobody owns a policy; there is the life insured, the person who pays the premiums, and the beneficiary. Sometimes two roles are shared (the person insured pays the premiums), but the life insured and the beneficiary are normally distinct, so the money is never part of their estate. – TripeHound Nov 22 '18 at 8:01
  • Not sure what you are suggesting here. If I buy a policy and pay the premiums, the proceeds are in my estate. If I make sure my child owns the policy, and I gift her the premiums to pay for it, the policy belongs to her and when I die, it's not in my estate. Someone, or some company owns it. – JoeTaxpayer Nov 22 '18 at 14:40
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There are two types of insurance: whole life and term.

I don't recommend whole life insurance, because you are insuring against something that will happen, your death. Maybe you could buy it if members of your family have a history of outliving the averages. This is called "adverse selection."

Term is different: it insures against your UNTIMELY death. Many people I know take term insurance for the X years until their last child leaves college, or some other well defined "term." They don't want to die before this term but will be satisfied with the insurance as a "consolation" prize.

2

You only insure assets, and you only insure them for the people that depend on them. You don't need to insure a liability. Therefore:

  1. If you are the income-earner and you have dependents, you should have life insurance to help your dependents if you die.
  2. If YOU are the dependent, then you shouldn't have life insurance, unless you provide a benefit that would cost money to replace.

Example: I have life insurance equal to a couple of years salary, in order to make sure my wife doesn't encounter any hardships if I die. I'm the primary income earner, and she will take of the kids. Once we have kids we'll get life insurance for her to cover what the costs would be to take care of the kids if she were to die.

0

Well, actually in your brother's case it's quite a good idea. Not as a savings method, but as what it is - insurance.

As long as he's alive and well he can pay his own debts, they're his problem and it's his responsibility. Once something, god forbid, happens to him - the debts become the problem of his survivors (you, if he doesn't have kids, for example). His life insurance should provide the means to pay off the inherited debts.

So the point of life insurance as insurance is to make sure those who survive you have enough of what they need to continue living as they were with you. Some policies take into account injuries and work disability, so that not only when you die there are benefits, but also when you had an accident and can no longer work. Some policies are basically a combination of savings and insurance - that's the policies discussed in the investing threads.

edit

as clarified in the comments, debts cannot be inherited per se, they will be paid off from the estate before disbursement of such. What it means though is, if the deceased had accrued significant debt, all his assets may go to the creditors leaving survivors with nothing, which may also mean homeless. That was the kind of a problem I was talking about.

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    I think you are mistaken. At least in the US debts are not inherited except perhaps to co-signers and spouses. Children and siblings would not be responsible for your debts in almost all cases. However, it WOULD cut into any inheritance they might expect, but a reduced inheritance isn't the same as inherited debt. – JohnFx Jun 4 '11 at 19:30
  • While technically true, that may mean that the children will be kicked out of their house to pay the deceased person's debt. Insurance is the way to avoid that. – littleadv Jun 4 '11 at 19:47
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    I'm sure that in most cases the bank would work with the kids to have them continue the payments, especially if they inherited the equity in the home. If they couldn't make the payments without your income, then that would be a good reason to have insurance. – JohnFx Jun 4 '11 at 19:49
  • "I'm sure that in most cases the bank would work with the kids to have them continue the payments" - and here we are, inheriting debt:-) – littleadv Jun 4 '11 at 19:51
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    Not necessarily. The kids don't have the obligation to continue to pay on the loan, only if they want to stay in the house. They can only inherit the equity the person had in the house, not the obligation. it is up to them if they want to buy the remaining equity from the bank. – JohnFx Jun 4 '11 at 20:02

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protected by Chris W. Rea Nov 22 '18 at 11:58

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