Not everybody needs life insurance. For others, it’s a critical part of financial security. Here’s how to determine if you need life insurance.
It’s no secret that insurance companies make money primarily by not providing benefits to their customers. This is why insurance gets expensive if you’re risky to insure. The more likely an insurer is to pay you for a claim, the more you’ll pay up front in premiums.
That’s just the way business works in the world of insurance.
With that said, this is no reason to avoid insurance altogether. Yes, you may pay for car insurance you never use. But you’ll be mighty glad to have it if you get into an accident. On the other hand, if you don’t drive or own a car, paying for car insurance would be silly. Even if you’re riding with someone else in their car, you don’t need to own car insurance.
So, really, the key to making insurance work for you is to know what you need and when you need it.
This brings us to the topic of life insurance. With other types of insurance, it’s normally easy to tell whether or not you need coverage. Drive a car? Get car insurance. Own a home? You need homeowners insurance. Life in a major flood plane? Flood insurance is a must.
But just because you happen to be alive doesn’t actually mean you need life insurance.
To determine whether or not you need life insurance, you first need to understand what it’s for. Then, you can figure out whether or not you need it.
What is Life Insurance for, Anyway?
Life insurance can be tougher to wrap your head around because the event you’re insuring against is your own death. That’s not something we like to think about on the best days. So life insurance can seem a little morbid.
The key here is to understand what your life insurance policy is actually for. Hint: It’s not for you!
Any other type of insurance you purchase is primarily to protect yourself. But life insurance doesn’t protect you at all. After all, to cash in a life insurance policy, you have to have passed away.
Life insurance is primarily meant to protect those you leave behind. This is often a family that includes minor children. But it could also mean your parents, your husband or wife, a close friend, or even your dog. (Though I wouldn’t necessarily recommend getting a life insurance policy with only your pooch in mind.)
When you die, you’ll leave behind people who will, at a minimum, have to tie up the loose ends of your estate. That’s just a fancy word for your possessions, accounts, and remaining debts. Even if you aren’t rich, you have an estate, and someone will have to deal with it when you pass away.
This usually means planning and paying for a funeral and burial costs. It may also mean settling your debts, selling what’s left over, or passing possessions to others, as your will specifies.
Bottom line: settling an estate can get expensive if you aren’t prepared. And you don’t want to put those costs on your loved ones.
Beyond just settling your estate, of course, there’s the idea of providing for those who depend on you. If your family depends on your income each month, you need to be able to replace that for them for a while. Most of the time, you want that income replacement to last at least until your children are self-supporting. And you may decide to cover additional costs, such as college funds.
So Who Needs Life Insurance?
Now you know what the purpose of life insurance is. But do you actually need it?
Well, if someone–whether a child, spouse, parent, or anyone else–currently depends on you for income, you definitely need life insurance. You’ll need coverage that lasts until:
- That person (or those people) don’t depend on you any more for income, or
- You have enough money saved to cover their needs should you pass away.
What if no one directly depends on your income? In this case, you may need life insurance. You’ll need some coverage if:
- You don’t have enough money in savings to cover end-of-life costs, or
- You have debts that would be difficult or impossible to settle out of the proceeds of your estate.
If B applies to you, life insurance is even more important if someone else is a cosigner on your debts.
For instance, what if your parents have cosigned a private student loan? Some lenders have the contractual option to call the full loan balance due as soon as either cosigner passes away. So your cosigner could have to deal with not only your death, but also this loan balance that is now suddenly due in full.
For this reason, it’s a good idea to maintain enough life insurance coverage to cover your potential end-of-life costs as well as any outstanding debts. This just makes life easier for those who are left to pick up the pieces should you pass away.
How Much Life Insurance?
How much life insurance you need depend largely on you reason for buying such insurance. We won’t go in-depth about how to make this calculation here. For more on that, check out this article.
For now, we’ll just break down the “how much” into two categories, based on our scenarios above.
In the first scenario, you’re getting a life insurance policy because someone depends on your income. In this case, you’ll need enough coverage to provide your beneficiary with the same amount of money for a certain length of time. You may want to provide the income for ten years, until they’ve graduated college, or some other length of time.
The amount of time will depend on your situation and on how big a life insurance policy you can afford. Remember, you can always layer policies, as well. If you can’t afford a $1 million policy today, maybe you can start with a $250,000 policy. As your financial situation improves, you can continue to increase your coverage or add additional policies to reach your target amount.
What about in the second scenario? Here, with no one dependent on your income, you can likely get away with much less coverage. That means your policy could be incredibly cheap on a monthly basis.
If your goal is to use the policy just to cover your end-of-life expenses and outstanding debts, total up your debts and add $5,000 to $10,000 to cover end-of-life expenses. You may also opt for a shorter term, so that your coverage ends when you’re debt-free and have money in savings.
As I said above, determining whether or not you need life insurance can sometimes be tricky. But most people would benefit from at least minimal coverage at some points in their lives. And the good thing is that for most people, a decent term life insurance policy will only cost a few bucks a month!
Published or updated September 13, 2017.