Life insurance is designed to protect a policyholder’s beneficiaries in the event of an insured person’s death. The death benefit can help compensate a family for the deceased person’s lifetime income or provide cash to pay any debts or business expenses they left behind. So Do I need life insurance? Continue reading to know if you need life insurance and reason why you need it.
But even though the basics of life insurance are easy to understand, it can be difficult to know if or when you need a policy of your own, and how much life insurance you might need. Here’s what you need to know about life insurance so you can decide for yourself.
Do I Need Life Insurance?
For most people, the answer to this question is yes. If you have children or other people that depend on you.
How Does Life Insurance Work?
Life insurance policies have three main characters:
- An owner or policyholder.
- The person whose life is insured (often the policyholder, but doesn’t have to be).
- The beneficiaries who receive the death benefit (can be one or more).
Life insurance provides a death benefit to the beneficiaries when the insured person dies in exchange for premium payments from the policyholder. Since your risk of death increases as you age, life insurance tends to be cheaper if you purchase it when you’re younger.
There are two main types of life insurance: term and permanent.
1: Term Life
Term life insurance is in effect for a specific term, generally between one and 30 years, and will only pay out the death benefit if the policyholder passes away during that term. If you outlive the term, your beneficiaries will receive no benefit from this kind of policy. Term life insurance tends to be the least expensive type of life insurance.1
2: Permanent Life
Permanent life insurance covers you for your entire life. The insurer charges more in premiums compared with term life insurance, but premiums can remain level, even though your risk of death increases over time. This is because a portion of the “additional” money you’ve paid to the insurer (relative to premiums you’d pay for a comparable term policy) builds up as a cash value, which you can access during the life of the policy.
That means this kind of life insurance can be used as a type of savings vehicle, giving the policyholder a potential source of late-in-life income.
Reasons to consider buying life insurance
Not everyone needs life insurance, but it’s important to recognize whether you do. You may need life insurance if:
reasons why you can’t afford to wait any longer.
1. Replace Lost Income
Life insurance works to provide financial security to your loved ones after you pass away. You have to consider what would happen if you were to die suddenly. This is especially true if your loved ones rely solely on your income. Get yourself adequate coverage. That way, you won’t leave your loved ones helpless when the monthly bills come around.
2. Cover Burial Expenses
Sadly, even a basic funeral service can run upwards of several thousand dollars. While it’s possible to pre-pay for your funeral, people don’t often think that far ahead. Pre-payment can ensure everything is in place for your loved ones after you die. However, there are risks to pre-payment. Life insurance can give you and your beneficiaries more of a guarantee, lifting a burden off of them as well as yourself.
3. Pay Off Debt
Just because you die doesn’t necessarily mean your debts will disappear. In the instance that you and your spouse have co-signed for a mortgage or other loans, your spouse may become entirely responsible for repayment. The other outcome could result in creditors trying to collect from your estate. While that gets rid of your debts, your heirs will receive the depleted remainder. Life insurance allows those you leave behind to take care of any lingering financial responsibilities.
4. College Planning
There are a number of ways to save money for your child’s education. You may not have thought that a life insurance policy would be a viable option. But insurance payouts can actually provide a good supplement your savings. If your child ends up borrowing money to get through school, the insurance proceeds could also help wipe out pesky student loans.
5. Build Cash Value
Term life insurance, a type of life insurance, stays in place for a set period of time. But another option, whole life insurance, provides permanent coverage that only ends if you cancel the policy. Whole life insurance allows you to build up cash value over time, an attractive prospect to any people. That cash value acts as an extra cushion that you can tap at any time. This may come in handy if you have a financial emergency down the road.
6. Diversify Investments
Some people also use life insurance as an investment tool with universal life policies. These policies are tied to a specific investment product. Then policyholders receive dividend payments based on the product’s performance. Before you dive into this type of insurance, you’ll want to read the fine print. That way you’ll know the potential risks and returns before you commit.
7. Business Planning
If you own a business, it’s vital that you have life insurance. This covers your obligations so your hard work doesn’t go to waste. Are you involved in a partnership with someone else? You should both have coverage. That way, if one of you dies, the other isn’t left holding the heavy financial bag.
8. Estate Taxes
When someone passes away, their heirs often face estate and inheritance taxes on any assets they receive. If you’re worried about your loved ones getting hit with a big tax bill, a life insurance policy can help cover these added costs.
9. Coverage is Affordable
One of the excuses people tend to make for not buying life insurance is the cost. But truthfully, coverage often ends up pretty affordable for most people. Term life tends to be less expensive than whole or universal life. Plus, the younger and healthier you are, the lower your premiums will be. Unless you smoke or have a preexisting health condition, you could find coverage for as little as $1 a day.
10. Peace of Mind
No one can truly predict the future. But having life insurance means you and your loved ones can prepare for any eventuality. Even with a small policy, you may find yourself sleeping a little easier at night knowing that your family has protection in place should something happen to you.
How Much Life Insurance Do You Need?
The amount of life insurance you need depends on why you need the insurance.
Enough to Support Your Family
People with dependents are often advised to purchase a life insurance policy equal to a multiple of their salary. This rule of thumb is a quick way to determine a death benefit that will provide several years of replacement income. However, it’s smart to use this rough calculation as a starting point, and then actually crunch the numbers on how much your dependents will need.
Consider how much other income they will be able to count on and how much non-salary income from your employer (such as health insurance subsidies or retirement contribution matches) will be lost when you die.
What Your Heirs Need for Your Business
If you’re purchasing insurance to protect your business, you should determine how much money your heirs will need to take over or sell it, how much you’ll need to replace a key person upon their death, or how much any co-owners will need to buy out your share.
Enough to Clear Your Debts
Life insurance shoppers who are concerned about leaving debts behind can calculate their death benefit based on the amount it will take to clear their debts after death. And those who wish to leave money to pay for their burial and other final expenses can fill out a funeral pricing checklist to estimate their insurance needs.
In some cases, though, the amount of coverage you require will be greater than what you can afford. You may wish to address this by purchasing a combination of term and permanent insurance, only term insurance, or a term policy that you can convert to a permanent policy later.
Less Common Life Insurance Needs
In addition to the typical reasons for carrying life insurance, a policy can help cover several less common needs, including:
1: Insuring Children
Buying a policy on a child can ensure the family will financially survive the loss of the child, though such a loss is relatively unlikely. It can also ensure the child’s ability to qualify for life insurance later in life, even after a health diagnosis that might otherwise make it impossible to pass life insurance underwriting.
2: Replacing Retirement Benefits
Though life insurance is typically marketed as income replacement for an insured during their working years, some retirees may choose to keep a life insurance policy after leaving work to replace the loss of any retirement income for the benefit of their spouse or any dependents.
Carrying permanent life insurance can provide the policyholder with a potential income source. Not only can you access your cash value once it has built up to a certain level, but some policies also allow for an accelerated death benefit, which lets a policyholder access the death benefit while they’re still alive in case of a triggering event, such as being diagnosed with a terminal illness, requiring extreme medical intervention, or needing nursing home care.
Is Life Insurance Worth It?
The decision to buy life insurance is personal, since so many of the insurance calculations depend on your circumstances, financial situation, and future plans.
But even individuals who don’t currently have dependents, a business, or significant debt may want to look into getting life insurance. That’s because the cost will go up as you age, meaning right now is likely the cheapest time for you to buy a policy.
In addition, even the best planners can’t predict the financial fallout of your demise, so carrying some life insurance can provide a layer of financial protection for your beneficiaries.
Thinking through the potential financial issues that could arise after your death can help you answer the questions of if, when, and how much when it comes to buying life insurance.