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- Life insurance is a contract between you and an insurance company, where the insurer promises to pay a beneficiary when you die.
- Talking about what happens to your money after you die may seem morbid, but it’s worth it.
- A financial planner recommends business owners and private student loan borrowers get life insurance.
Life insurance is a contract between a person and a life insurance company, where the life insurance company agrees to pay a beneficiary — typically someone’s family member — if the insured person dies. The contract specifies how much money your beneficiaries will receive.
It might feel morbid to talk through such details with a complete stranger at a life insurance company, but financial planner Spencer Betts says it’s worth having that protection in place if the worst happens, and it won’t cost much.
“Life insurance on somebody between 40 and 60 is very inexpensive because it’s a very small probability that you’re going to die,” he explains.
Here are four types of people who should have life insurance, according to Betts.
1. People with private student loans
Federal student loans are discharged after the borrower dies, but borrowers with private student loan debt may face different circumstances.
Private student loan debt you took out on your own may be discharged without issue — though not always, each lender’s policy will differ — but private student loan debt taken out with cosigners will be passed on to the cosigners if the loans were taken out before November 20, 2018. Per a provision in the Economic Growth, Regulatory Relief and Consumer Protection Act, cosigners must be released from the loan if it was taken out after November 20, 2018.
A life insurance policy ensures your cosigner or next of kin can cover your student loan debt, no matter the student loan lender’s policy.
2. People with cosigners on their debts
Betts says, “If you’re single with no dependents, and you have a car loan of $20,000, the automobile company might repossess your car, but they won’t come after any other person in your family because nobody cosigned for you.” In contrast, cosigners are responsible for paying off unpaid debts after a person dies.
So if someone cosigned with you on a personal loan, for example, you’ll want to have a life insurance policy that covers the cost of that debt.
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3. Business owners who want to pass down the family business to their children
If you’re a business owner who plans to pass own your company to your children after you die, life insurance can be more beneficial than you think, says Betts.
“If you die and you’re the sole owner of that company, the value of that business could be subject to estate tax. You might need life insurance to offset the estate tax if you want to continue the family business, your family’s farm, or something along those lines.”
In the case of a business owned by partners, Betts says that business partners can write agreements of how the business assets will be paid out, passed down, or divided in the event of one business partner’s death.
“Using a buy-sell agreement,” he says, “you can specify things like, ‘If my business partner dies, I will pay his family $1 million, or half of what the business is worth at the time of his death.'”
A life insurance policy with your business partner as the beneficiary ensures they have those funds on hand, and your family gets the financial support they need.
4. Parents of children with disabilities
Betts says parents of children with special needs should have life insurance to make sure their childcare costs are covered after their death. The child should not be the beneficiary of the parent’s policy. Rather, in some cases, a special needs trust would be most appropriate.
Says Betts, “This is one of the biggest reasons to get life insurance that we see out there. If you have kids with special needs, you might need some life insurance so that somebody can help take care of your child or dependent long term.”
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