Do You Need Life Insurance?

With a life insurance policy, you can provide financial safety for your loved ones after you pass away. While life insurance is a good idea for many people, it’s not right for everyone. For example: If you’ve built up enough wealth to cover your end-of-life expenses and leave an inheritance, or nobody relies on you financially, it may not be worth it.

Below, we’ll help you determine if you need life insurance, how much coverage is ideal, and what type of policy is best for your unique financial goals.

Who needs life insurance?

In general, anyone with dependents, significant debt, or financial responsibilities could benefit from life insurance. Here are several examples of people who should consider a policy:^[1]

• Breadwinners: If your partner depends on you financially, they may be left without income upon your death. Life insurance can help them pay for their everyday expenses.

• Parents of minor children: Raising children younger than 18 can be expensive. Life insurance coverage can take care of their shelter, food, clothing, education, and other expenses if you pass away.

• Homeowners with a mortgage: Life insurance can help ensure your loved ones can continue to cover mortgage payments after you’re gone. Without it, they may be left scrambling to find a place to live.

• Parents of special needs children: If you have a special needs child, you might have to support them financially for their entire life. In this case, a life insurance policy can come in handy.

• Someone with significant debts: Your debts may become your loved ones’ responsibility after you pass away. With a life insurance policy, you can help alleviate this burden.

• Business owners: If you own a business, your passing would likely take a serious toll on your employees. A life insurance payout can help them pay for expenses like rent and potentially keep your venture alive.

• Stay-at-home parents: Even if you don’t have a traditional job because you stay at home with your children, life insurance coverage can be a smart move. It may provide your partner with the financial resources it takes to clean, cook, care for children, and take care of other services you provide.

Who doesn’t need life insurance?

Life insurance isn’t worth it for everyone. For example, a policy may not make sense if you’re a single person with no dependents. Also, if you have no significant debt or are comfortably retired with a paid-off house and substantial nest egg, you may want to save and invest your money into other assets instead.

How much life insurance should you buy?

To zero in on how much life insurance coverage you need, consider these methods:

• 10x your income: The general rule of thumb is to buy a policy that covers 10 times your income. For example, if you earn $60,000 per year, a $600,000 policy may be sufficient.

• 10x your income + $100,000: If you have children, the guideline of 10 times your income plus $100,000 may make sense. Multiply your income by 10 and add $100,000 for every child you have to account for their college and other educational expenses.

• Income plus cushion: The goal of this method is to buy enough coverage for your loved ones to replace your income without actually spending the payout. They can save or invest the lump sum to generate income to cover their expenses.

• DIME: DIME stands for debt, income, mortgage, and education. The DIME method requires you to add up all these financial obligations to come up with the right amount of life insurance.

Types of life insurance to consider

As you explore life insurance policies, you’ll find two main options: term life insurance and permanent life insurance. With term life, you’ll receive coverage for a set period, usually between 10 and 30 years. If you pass away during this term, your loved ones will receive a payout known as a death benefit.

On the other hand, permanent life insurance will last as long as you make your premium payments. It may also come with a cash account, which accumulates over time. Permanent life insurance tends to be more expensive.

Within each life insurance category, you’ll notice other specialized policies designed to meet the needs of various policyholders. Several examples include:^[2]

• Whole life: Whole life is a popular type of permanent life insurance. It includes a death benefit along with a cash value account, which will accumulate based on the insurer’s dividends.

• Universal life: Universal life is a flexible option. You might be able to increase the death benefit if you pass a medical exam, and once the cash account grows, you can use the funds to cover your premiums.

• Variable life: Variable life combines a death benefit with a savings account. You can use the account to invest in stocks, bonds, and mutual funds.

• Guaranteed issue life: Guaranteed issue life promises coverage and doesn’t require a medical exam. The downside is its higher premiums.

Here’s a closer look at how term life and permanent life insurance compare:

Cost of life insurance

In general, term life insurance is more affordable than permanent life insurance. But your exact life insurance rates will depend on several factors, such as your age, gender, health status, family medical history, and lifestyle.

The table below shows monthly averages for term and permanent life policies for $250,000 worth of coverage.

How to buy life insurance

If you’re in the market for a life insurance policy, follow these steps to secure coverage.^[3]

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  1. Evaluate your needs

  Ask yourself what you want from a life insurance policy. Maybe your goal is to cover your loved one’s expenses and replace your income after you pass away. Or perhaps you hope to pay for your funeral or leave an inheritance.

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  2. Decide on a type of policy

  If you’re on a budget and hope to lock in coverage for a set period of time, term life insurance is likely your best bet. But if you prefer lifelong coverage and a cash value account, permanent life insurance is the better move.

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  3. Shop around

  Do your research and get life insurance quotes from at least three life insurers. Compare premiums, coverage options, riders, and customer service ratings.

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  4. Apply

  Some life insurance companies will let you apply online. Others will require you to work with a life insurance agent or financial professional to complete the process.

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  5. Complete a medical exam

  Depending on the policy you choose, you may need to take a medical exam. A healthcare professional might come to your house, or you may have to go elsewhere to take care of it.

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  6. Review and buy the policy

  Upon approval, the insurer will provide you with a contract. Read it carefully and make sure you understand its terms before you sign on the dotted line.

To land a good deal on life insurance, maintain good health, quit smoking, and buy when you’re young. Don’t forget to comparison shop as not all life insurance companies are created equal and premiums can vary greatly.

Do you need life insurance FAQs