At some point in your life, you'll probably be faced with the question of whether you need life insurance, which is a way to protect your loved ones financially after you pass away, and your income stops. The answer to whether you need life insurance depends on your personal and financial circumstances.
The main reason why the majority of people buy life insurance is to protect themselves financially if an income earner passes away. In most households, the loss of an income can put severe strain on family finances, potentially jeopardizing their lifestyle and long-term economic security. This tends to be true earlier in one’s career—before the build-up of assets—rather than closer to retirement, when assets have been already accumulated. This means that the need for life insurance is often temporary, and term insurance may be the appropriate type of life insurance.
Term insurance is simple and inexpensive. You pay a fixed premium for the term of the policy, and you are covered for the term duration, which is typically 10, 15, 20 or 30 years. The term should be matched to the expected expiration of the underlying insurance need, such as your anticipated time of retirement, mortgage payoff, college funding, etc.
Paying estate taxes
For high-net-worth individuals the payment of estate taxes may be more a concern than the loss of an income earner. Ensuring that funds are available for this purpose is another use of life insurance. Because of the current federal estate tax exemption of $12.92 million per person, most Americans do not have to worry about federal estate taxes. This amount will drop significantly in 2026 unless Congress intervenes. It is important to note that estate taxes may also be due at the state level. Illinois is one of the states that still has an estate tax, with a $4 million exemption. Some states levy an inheritance tax, which is a tax on what you receive as the beneficiary of an estate.
Married couples may want to consider a second-to-die life insurance. Both spouses are insureds, and the policy pays out at the death of the second spouse. Under a typical estate plan for a married couple, to the marital deduction defers payment of estate taxes until the death of the surviving spouse. A second-to-die life insurance policy ensures liquidity at a time that estate taxes are more likely.
Ensuring estate liquidity
Irrespective of estate taxes, the settlement of an estate may also be a time where liquidity is needed. Funds may be required for the settlement of debts, or the payment of bills that arise when someone has passed (i.e., funeral and hospital bills). If investment accounts are available this may mean a forced liquidation, regardless of whether it is a “good time to sell.” A decedent may have a lot of illiquid assets, such as real estate and business interests, where raising cash quickly can be difficult. Life insurance can provide an immediate source of liquidity at such a time.
Ensuring a legacy
At times, a person may want to ensure a “minimum legacy” regardless of the performance of an investment account or other factors. As long as insurance premiums are paid according to the terms of the policy, the life insurance policy should pay out the death benefit. This means that you can be sure that your heirs at least receive this amount, regardless of the performance of your portfolio.
Securing your business
Another common use of life insurance is for business purposes. When someone is a part owner of a business, then funds may be needed for the other owners to purchase the decedent’s share of the business. For example, if each partner’s share is worth $5 million, then buying out that share at a death may be challenging for the other partners. Life insurance can fill this need. Multiple setups are possible, but a common one is that the business/partnership owns a policy on each of the owners/partners and is the beneficiary of each policy. Key employee insurance is another instance where a business owns life insurance on an employee, but for the sake of providing additional funds at a time where business continuity may be severely affected by the passing of a key employee.
These are just some examples of the potential needs that life insurance could address. If you're still unsure about whether you should buy life insurance, a good question to ask yourself is, “If I died today with no life insurance, would my family need to make substantial financial sacrifices and give up the lifestyle to which they've become accustomed in order to meet their financial obligations?”
If you need life insurance, don't delay
Once you decide you need life insurance, don't put off buying it. Overall, it gets more expensive with every day that passes, as age and health are the primary drivers of insurance cost. Although no one wants to think about and plan for their own death, you don't want to make the mistake of waiting until it's too late. Once you purchase a life insurance policy, make sure to periodically review your coverage—especially when you have a significant life event, such as the birth of a child or the death of a family member—and make sure that it adequately meets your insurance needs. If you need help reviewing your coverage, contact your insurance agent or broker.
The financial experts at Busey Wealth Management can help you plan for the future with tailored solutions to fit your individual needs. To learn more, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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