Why Should I Have Life Insurance, and What Kind of Life Insurance Do I Need?

Who Needs Life Insurance?

In both single- and dual-earner households, losing one person’s income can have serious financial implications. If someone other than you relies on your income, such as a spouse, child, or aging parent, you should strongly consider purchasing a life insurance policy. Your financial dependents need a way to meet their immediate and ongoing financial needs if you were to pass away unexpectedly. Moreover, if you’re regularly saving part of your income for retirement or your children’s college expenses, your family will need a way to make up for your lost contributions.

Additionally, you should consider purchasing life insurance if someone relies on your domestic labor. Few people think through the financial implications of losing a stay-at-home spouse, which can be significant. If your family depends on you to provide childcare, prepare meals, clean, and perform other essential household tasks, someone will need to provide these services after you pass away. Your spouse might need to work fewer hours and take a corresponding hit to their income, or they might need to hire someone to take over some or all of those responsibilities. Either way, your death will leave a major financial impact, even without a significant loss of income.

What Kind of Life Insurance Do I Need?

Term life insurance is suitable for those who need life insurance only for a set period, such as during the peak of their earning years or while their children are living in the home. Terms of life insurance are typically between 10 and 30 years, and if you pass away within the established timeframe, your beneficiaries receive a lump sum, known as the insurance’s death benefit. However, if you pass away after your term life insurance expires, your beneficiary will not receive any compensation. Term life insurance is also typically much more affordable than whole life insurance, and insurance providers often offer the opportunity to convert or replace the policy when it expires if you decide that you still need the coverage. This system makes sense for most people because their need for life insurance diminishes significantly after they retire and their children become adults. When you are older, fewer people rely on your income, and you are more likely to have accumulated savings and assets that effectively make you self-insured. 

Being self-insured means that your savings and investments are sufficient to cover the expenses that insurance would have covered. If you have saved enough that you are no longer dependent on a salary and your spouse or family could live off your investments if you unexpectedly passed away, you no longer need life insurance. Additionally, you no longer need life insurance if you do not have dependents who will need financial support after you pass away, such as if your spouse has already passed and your children are financially independent. 

Whole life insurance guarantees a death benefit no matter when you die as long as you continue to pay the monthly premiums. This form of life insurance works for those with unique financial circumstances that necessitate permanent coverage, such as a business owner with a large, illiquid estate or someone caring for a child or family member with a disability who will likely never become financially independent. Some people prefer whole life insurance because the policies can come with additional benefits, such as the ability to build cash value and take out loans on the death benefit amount. However, premiums for whole life insurance are often much higher than those for a term life insurance policy with a comparable death benefit. When determining if you want or need whole life insurance, consider whether you could meet your needs with a term policy instead. In some cases, a term policy will be sufficient. 

How Much Life Insurance Do I Need?

Several factors come into play when determining how much life insurance you need. These factors include how the loss of your income or domestic labor will financially affect your beneficiaries, the end-of-life expenses you expect to incur (e.g., funeral costs and estate taxes), whether your beneficiaries will be left with debt after your passing, how long you want your death benefit to financially support your beneficiaries, and how much you already have saved and invested. 

Taking these factors into consideration could look like this: My family relies on my income to support about $5,000 in monthly expenses and retirement savings. I want to cover that income for at least 20 years after I pass away. This amount equates to about $1,200,000. Additionally, I want to cover the current remaining balance on my mortgage and student loans, which totals $300,000. I expect my funeral and end-of-life medical costs to be about $30,000. Finally, I have already saved $30,000 for retirement in a 401k. Therefore, I need approximately $1,500,000 in life insurance.