Do I Need Life Insurance?

Life insurance isn’t really for you. It’s for the people who depend on you.

It’s for your children, your significant other, your business partners — for anyone who would face a financial burden if you died.

If someone counts on you for financial support, you need life insurance.

Why Is Life Insurance Important?

Buying life insurance won’t protect your family from devastation if you died unexpectedly. It won’t replace the long hours you dedicate to your job or business.

It won’t keep your significant other from grieving you.

But it could keep them from losing the house, closing the business, taking the kids out of school, or defaulting on loans.

Life insurance would pay a lump sum, tax-free, to your policy’s beneficiary if you died with coverage in force.

In exchange for this kind of protection, you’d pay regular life insurance premiums to keep the policy active, just like you do for renters insurance or auto insurance.

Who Needs Life Insurance?

When you buy life insurance, you name a beneficiary — the person who would receive the policy’s payout if you died. Insurance companies call this payout your “death benefit.”

Most people name their spouses, adult children, or business partners as the policy’s beneficiaries. You could also name a charity, a lender, or a trust fund as beneficiaries.

In most cases, your beneficiary has the freedom to use the death benefit as he or she sees fit.

Top Reasons to Get Life Insurance

Your life insurance coverage could:

• Pay Off the House: Your life insurance payout could pay off your family’s mortgage, freeing them from ongoing monthly payments and giving them ownership of a valuable asset.
• Pay Off Other Debt: Free your loved ones from the financial burden of a private student loan debt, auto debt, personal loan debt,  or credit card debt, even if they were co-signers on the loans.
• Pay College Tuition: Your life insurance payout could take care of the costs of higher education so your family wouldn’t have to borrow.
• Provide Income Replacement: Your death benefit could buy your family time to readjust to the new reality of life without you. Your family members’ living expenses would be covered by your policy while they planned for their financial future.
• Go Into Savings: Life insurance money could go into savings for your family’s future stability.
• Help Run the Business: If you’re a partner or a key executive in your business, the life insurance payout could help keep the company open while your partners figure out how to move forward.
• Pay Final Expenses: A small burial insurance policy will keep loved ones from paying for funeral expenses.
• Be Invested: Your spouse could hire a fiduciary to invest the life insurance money to create a more stable future with more financial freedom.
• Provide Heirs with a Liquid Asset: Settling an estate takes time. If your estate is comprised of real estate and other illiquid assets, cash from a life insurance payout could help your heirs pay legal fees, estate taxes, and final expenses while your trustee settles your estate.

These aren’t the only uses for a life insurance payout. Everybody has his or her own financial goals and needs, and life insurance money could address any of them.

What Type of Life Insurance Do I Need?

Here’s the short and simple answer to this question: You probably need term life insurance.

Term life is the simplest and most affordable way to protect your family from the financial costs of your untimely death.

Not only is term the most affordable option, but it also provides the largest policies with death benefits well into the millions of dollars.

All this is possible because term life insurance, by definition, has an expiration date. Most people buy 20-year or 30-year term life insurance policies. When the term ends, you’ll no longer have coverage at the same low price.

An expiring term policy isn’t always a bad thing. In 20 or 30 years, your life will be a lot different. You may no longer have children at home. Your business may be established enough to survive without you. Your house may already be paid off.

When your term expires, you can reassess your life and buy coverage that meets your needs then. And at that point, you may no longer want term life insurance.

Other Life Insurance Options

You may want a more complicated type of policy, one that includes an investment component, and one that lasts the rest of your life

• Whole life insurance: This type of coverage costs more, dollar for dollar, than term life. Along with providing a death benefit, your premiums fund a cash value that could become an asset later in life. This kind of coverage is designed to last the rest of your life.
• Universal life insurance: Universal life is a special type of whole life policy. It can be more affordable because the cash value can be used to lower premiums later in life.
• Final expense insurance: This type of permanent coverage is designed for older adults who’d like to cover funeral costs or other final expenses. These policies can be affordable because they’re so small, usually ranging from $10,000 to $30,000.

How Much Life Insurance Should I Buy?

The ideal size of your life insurance policy depends on your individual needs, and every shopper has different needs.

But, on average, younger people need larger life insurance policies because they are more financially vulnerable.

Younger people have had less time to prepare for future financial obligations by saving and investing. They tend to have a lot of debt, and they also have young children who not only need child care now but will depend on them for decades to come.

It’s not uncommon to buy $1 million or $2 million in term life insurance. And this amount of coverage is cheaper than you might think, especially if you’re healthy and relatively young.

How to Calculate Your Coverage Amount

Some financial advisors have put together “rules of thumb” about life insurance coverage amounts. A leading guideline is to buy 10 to 20 times your annual income — assuming your salary is the main source of financial stability in your family’s life.

If you make $100,000 a year, based on this rule you’d need $1 million to $2 million in life insurance.

You should always take these sorts of general guidelines as a starting point and not a final answer when you’re trying to decide how much coverage to buy.

If your kids plan on attending an elite private university, you may want to consider buying a policy that exceeds this guideline. Likewise, if you’re debt-free and have already planned well for the future, you should buy a smaller policy.

In short, you should buy only the coverage you need. Doing this will limit costs and help ensure you’re eligible for the coverage.

Am I Eligible for Life Insurance?

Eligibility for life insurance depends a lot on your health, age, job, and hobbies.

Anyone who’s had a car wreck knows that car insurance costs more after an accident. Auto insurers hike the price because the policyholder is costing them money.

A similar thing happens with life insurance. If your policy is likely to cost the insurance company money in the near future, you’re more likely to get denied coverage.

If you do get approved, it may cost more or the policy may not provide enough money for your family members’ needs.

Life Insurance Underwriting

Life insurance companies will assess your risk of dying as part of the underwriting process when you apply for coverage.

They’ll want to know about your:

Health

In most cases, your insurance company will schedule a medical exam to screen for pre-existing conditions or risk factors. You can skip the exam and answer a series of health questions instead. Doing this will increase your policy’s costs if you’re a healthy non-smoker.

Family’s Health

Expect some questions about your family’s health history. An applicant with a multi-generational family history of heart disease or diabetes can expect higher premiums.

Job

Dangerous jobs like roofing and commercial fishing can limit your life insurance choices because the risk of mortality in your job is so high. Consider working with an independent life insurance agent who can help you see a wider variety of policy options.

Lifestyle Choices

Using tobacco will inflate your premiums significantly. Dangerous hobbies like skydiving and SCUBA diving can also increase the cost of coverage. Even financial choices, as reflected in your credit score, could affect life insurance eligibility and costs.

What About My Life Insurance at Work?

I get this question a lot. People whose jobs provide life insurance as an employment benefit come across posts like this one and say, “I’ve already got this covered. I don’t need my own life insurance policy if I have one from work. Right?”

Well, maybe.

In most cases, life insurance through work has a couple of serious weaknesses:

1. Small death benefits: The policy’s amount of life insurance may be only $10,000 or $25,000 — not nearly enough money to protect a young, growing family with a new mortgage and big plans for the future.
2. The policy isn’t yours: At-work policies tend to be group policies which means you’d lose the coverage if you changed jobs or even changed benefit packages.

At-work policies aren’t the only misleading types of coverage out there.

Some people buy mortgage life insurance when they buy a new house. This kind of coverage would pay off your mortgage if you died. But it wouldn’t help in any other area of your family’s financial life.

There’s nothing wrong with mortgage life or at-work group policies. But you should know the limits of these types of policies if you’re counting on them to protect your family.

Only your own, unique life insurance policy — with a beneficiary and a coverage amount chosen by you — can provide the protection and peace of mind you’re looking for.

Not Everyone Needs Life Insurance

So far we’ve covered a lot of reasons to buy life insurance coverage. But sometimes it’s easier to take a different angle and ask, “Who doesn’t need life insurance coverage?”

If someone in the following financial circumstances asked for a life insurance quote, I’d tell them to consider going without a policy:

• Lives off investments: Life insurance can still help provide a liquid asset as your heirs settle the estate and pay estate taxes, but it isn’t essential.
• Children are financially independent: If your children have their own lives and their own bills and they don’t need your financial help, life insurance could be redundant.
• No bills and healthy savings: When you’ve already set aside money for funeral expenses and you have no other liabilities, you may not need life insurance.

Let me be clear: All of these people could still buy coverage if they wanted. Some do. Life insurance has some unique advantages beyond its primary purpose of protecting your family.

Ways To Use Your Life Insurance

Term life has a simple purpose: financial protection for the people you care about in case you die.

Final expense insurance also does its simple job well: providing money for your burial so your family doesn’t have to come up with the money.

But other types of life insurance — whole life and universal life, especially — have versatile uses beyond the death benefit.

Both whole and universal life build cash value so they can serve as an investment. They’re not a particularly good investment.

In fact, before considering this kind of insurance for its cash value you should max out your 401(k) and IRA contributions.

But, once you’ve done that, you can also find tax shelters in these types of permanent life insurance policies.

Universal life’s cash value can be tied to stock indexes or invested in mutual funds which means your policy could grow more dynamically — or decline — in value as time passes.

After a few decades pass, these types of policies can hold enough value to use in other parts of life: to borrow from, to surrender and cash out, or even to donate to a charity or foundation.

I recommend speaking with a financial advisor before buying life insurance for its investment component. An advisor can usually show you better options.

When Should I Buy a Policy?

If people count on you financially, the best time to buy life insurance was yesterday. If you missed that deadline, that’s OK. Today is the second-best time to buy coverage, and it’s not too late.

We work with more than 30 of the best life insurance companies in the nation and would be glad to help you find the best policy, the right coverage amount, and the right price.

Hopefully, you’ll never need the coverage, but if you do, it can make all the difference in the world.