How Do I Know if I Need Life Insurance?

If you have a mortgage, a small business or any dependents relying on your income, then you likely need life insurance. The amount and type of life insurance you should buy may depend on how old you are, how much money you make and what expenses you intend for the life insurance death benefit to cover.

Keep reading for more information that can help you decide whether you need a life insurance policy and when you should buy life insurance.

Am I Required To Have Life Insurance?

Life insurance is not required by law in any state. Even if your employer offers life insurance coverage, you likely won’t be required to opt in. Nevertheless, there are several situations in which it is heavily recommended that you invest in a life insurance policy despite the fact that it is technically optional.

In general, if there are people dependent on your income, then buying life insurance to provide income replacement benefits for your beneficiaries can be a good idea. People who fit this profile often include couples, single parents, homeowners still paying off their mortgage, the sole income provider of a household, caregivers to their parents, small business owners with partners, elderly people who want to cover their final expenses and those with large debts.

When Do I Need Life Insurance?

In general, you should buy life insurance as early in your life as possible since coverage is cheaper the younger and healthier you are. Somebody who is 60 years old may have to pay hundreds of dollars more for term life insurance coverage than somebody who is 25 years old. If you don’t have any dependents yet but plan on getting married or having children at some point, it could be beneficial to go ahead and purchase a life insurance policy so you can lock in a low rate.

For the most part, the only scenarios in which you likely don’t need life insurance at all are if you:

1. Have enough money saved up to take care of your dependents in case you die
2. Don’t have any dependents relying on your income and don’t plan on ever having any
3. Are already at or nearing retirement age and don’t have a significant income that needs to be replaced or any outstanding expenses that need to be covered after you die

What Types of Life Insurance Do I Need To Consider?

The two main categories of life insurance coverage are term and permanent life insurance. See the below sections for a detailed breakdown of each type of coverage, which can help you decide what type of policy may best suit your family’s needs.

Term Life Insurance

Term life insurance provides coverage for a limited window of time, potentially lasting as little as one year or as much as 30 years.^[1] It tends to be cheaper than permanent life insurance since it’s possible that you won’t die during the coverage period, meaning your insurance company may be able to collect life insurance premium payments without ever having to pay out a death benefit.

A major benefit of term life insurance is that it allows you to purchase coverage for only the period of your life when you most need it. For example, you could purchase a 30-year policy to last through your mortgage repayment period, a 20-year policy to last through your last child’s transition into adulthood or a 10-year policy at age 55 to last through your retirement.

There are multiple variations of term life insurance including the following:^[1]

• Level: Your beneficiaries’ life insurance payout will be the same if you die at any point during the coverage period for a level term life insurance policy, which is the most common type of term life insurance.
• Decreasing: Conversely, decreasing term life insurance lowers the death benefit over the course of the coverage period. This type of policy accounts for the fact that you may not need as much coverage toward the end of the term since your children may be older and you may be closer to paying off your mortgage or retiring.
• Renewable: If you buy renewable term life insurance, you can renew your coverage at the end of each term up to a certain age, even if you develop a health condition that would cause your insurer to reject you if you were applying for a new policy. However, your insurance carrier may still raise your premiums at the beginning of each new coverage term.
• Convertible: You may be able to transition a convertible term life insurance policy into a permanent life insurance policy. Like renewable term life insurance, this type of policy enables you to extend your coverage without undergoing another full underwriting process.
• Return of premium: With a return of premium term life insurance add-on, you may be eligible for a full or partial refund of your premium payments if you survive to the end of your coverage period. Keep in mind that you may have to pay significantly higher premiums for this kind of policy.

Permanent Life Insurance

For the most part, permanent life insurance coverage never ends, although some policies may expire if you happen to live more than 120 years.^[2] Since your insurer will almost definitely have to pay out a death benefit to your beneficiaries at some point, you can generally expect to pay more for permanent life insurance than term life insurance.

Another component that makes permanent life insurance policies more expensive is the fact that they accrue cash value over time. You may be able to pay part of your premiums using accumulated cash value, borrow from your cash value and pay it back with interest, lower your policy’s death benefit in order to permanently withdraw some of its cash value or cancel your policy in order to permanently withdraw all of its cash value.^[3]

Permanent life insurance policies can vary in terms of how they accumulate cash value and how their premiums function. The main types of permanent life insurance are as follows:

• Whole: Whole life insurance grows cash value progressively at a guaranteed rate, while the premium and death benefit remain the same for the entire time that the policy is active. It is the most common type of permanent life insurance.^[4]
• Burial: Burial insurance is a subset of whole life insurance that typically provides a small death benefit ranging from $5,000 to $25,000.^[5] It is primarily recommended for older people who can no longer afford a more comprehensive life insurance policy but would like to purchase enough coverage to help their loved ones cover their funeral and other final expenses when they die.
• Universal: The cash value component of a universal life insurance policy functions similarly to that of a whole life insurance policy but its premiums are more flexible. You may be able to raise or lower your premiums and death benefits depending on how your coverage needs change over time.
• Indexed universal: While you will also encounter flexible premiums and death benefits with an indexed universal life insurance policy, your cash value will not grow at a set rate. Instead, it will grow based on the performance of a stock market index like the S&P 500, typically with limits on the amount of cash value the policy can gain or lose.
• Variable: Variable life insurance is the most high-risk, high-reward type of permanent life insurance because it functions like indexed universal life insurance except without any limits on how much money your policy can gain or lose.

How Much Life Insurance Do I Need?

Many experts recommend purchasing life insurance that can provide a death benefit between 10 and 30 times your current salary depending on your age.^[6] However, your life insurance coverage needs may differ depending on your circumstances.

For more a customized analysis of how much coverage you need, you could use the DIME formula:^[6]

• Debt: First, add up any outstanding debts you would want to help your spouse or another dependent pay off after you die. This may include credit card debt and outstanding loan payments such as auto or business loans.
• Income: Next, add how much money you make per year multiplied by the number of years you expect your family to need that income. While you could simply multiply your salary by the number of years until you reach age 65, you could take into account factors such as when your children will graduate and potentially move out of the house for a more precise estimate. Additionally, you may want to factor in the value of non-income benefits that are tied to your job such as health insurance.
• Mortgage: You should also add the remaining balance on your home’s mortgage since it is often your biggest investment and possibly the biggest financial burden that would be placed on your dependents if you were no longer around to make payments.
• Education: Finally, you can add a large sum of money to help your children pay for college in case you die before they finish high school. As a general rule of thumb, you’ll want around $100,000 to $150,000 worth of coverage per child.

Even if you already have a life insurance policy through work, you may still need to purchase supplemental life insurance. Although recommended life insurance death benefits can easily reach hundreds of thousands to millions of dollars, employer-sponsored group life insurance policies may only offer $50,000 to $100,000 worth of coverage.^[7]

Keep in mind that your life insurance needs may also depend on your role within your household. For example, you may not have an income to replace if you are a stay-at-home parent but you may still want a policy with enough coverage to pay for services like child care, housekeeping and cooking services for several years after you die.

How Do I Get Life Insurance?

Comparing quotes from three to five distinct life insurance companies is the best way to make sure you’re getting the best deal on the coverage you need. Of course, shopping around can become incredibly time consuming if you reach out to insurance carriers individually in order to provide them with your information.

As a result, you should expedite the process by shopping through SmartFinancial. Not only can we help you compare quotes from multiple insurers after you fill out a brief one-time questionnaire but we also provide this service for free. Fill out the questionnaire and start comparing life insurance rates today by clicking here.