Do You Need Life Insurance?
Written by
Andrew Flueckiger in an insurance writer for TrustedChoice.com. He's a licensed insurance agent who has earned his CIC designation and has written extensive insurance articles for many publications.
Reviewed by
Grant is the founder of Stewardship (in Gilbert, AZ) and was named a top entrepreneur before he reached the age of thirty-five.
If you don’t currently have life insurance and are considering buying it, there is no better time to buy life insurance than right now. Not only can we not predict the future and when our time is going to come, but life insurance only gets more expensive as you get older.
If you delay buying life insurance, it will cost you more money because your premiums are going to be higher than they are right now. And if you don’t buy life insurance in time, your loved ones could be left with a huge financial hole that they won’t know how to fill. Still not convinced? Let’s take a closer look at what life insurance is and why you need it.
What Is Life Insurance?
When you pass away, life insurance pays a lump sum of money to your designated beneficiary or beneficiaries, whether it’s a spouse, children, or anyone else. Although most people plan on living a long and full life, accidents and premature deaths do happen and can leave your dependents without your income, making life insurance one of the most effective methods of income protection.
There are many different types of life insurance policies, but they can all be broken down into two broad categories:
- Term life insurance. Term life insurance could be considered “pure” life insurance, because it’s simple: it will pay your beneficiaries a death benefit if you pass away while the policy is active. Term policies have a guaranteed premium for a certain amount of years, typically between 10 and 30 years. After the term ends, the policy will give you a new rate each year based on your current age, which makes it essentially unaffordable after the term expires.
- Permanent life insurance. There are many different types of permanent life insurance, with the two most popular types being whole life and universal life. Permanent policies will stay in force for your entire life and are guaranteed to pay a death benefit as long as the policy is active. They also grow a cash value component, which is similar to a savings or investment account. This cash value grows on a tax-deferred basis and you can pull it out at any time during your life and use it for anything. However, the amount that you pull out will reduce your death benefit, and if you pull out the entire cash value amount, the policy will terminate.
Do You Need Life Insurance?
Simply put, if you have dependents who rely on your income, then you probably need life insurance.
Life insurance typically isn’t required by anyone, unlike car or homeowners insurance. However, it’s arguably more valuable than either of those types of insurance because it can ensure your dependents have money to live on if they lose your income if you pass away prematurely.
Many people have some type of life insurance through their employers, but there could be two main problems with this:
- Your employer-based life insurance won’t go with you if you lose or switch jobs.
- It’s likely not enough life insurance. Your policy may only be one or two times your annual salary, which is better than nothing but probably won’t go very far if you do pass away.
Term life insurance typically isn’t too expensive and can provide your family and dependents with critical money to be able to properly grieve your loss and begin to move on.
Permanent life insurance serves a double purpose: it pays your dependents a death benefit if you pass away, but can also be used as a long-term investment tool that can be a retirement supplement or anything else.
A common mistake that people make is to view permanent life insurance as an inadequate investment tool; their money would grow faster if they invested it themselves. This may be true from an investment point of view, but permanent life insurance brings extra benefits that an investment tool simply can’t match:
- It’s life insurance, which means if you pass away tomorrow or next year, your beneficiaries will receive the full benefit amount. An investment account takes time to grow so it wouldn’t have much money in it if you were to pass away soon.
- Cash value life insurance isn’t meant to replace an investment account; you could have room for both. Its primary purpose is life insurance; it just has the added benefit of having a cash value growth tool to it. So you can view this is yet another financial tool that you can use later in life.
Life insurance, whether its term or permanent, can be used in many ways and has many purposes. But its primary purpose is important enough anyway: to allow your loved ones to properly grieve your loss without worrying about how they’re going to buy food and pay the bills tomorrow.
How Do You Determine How Much Life Insurance You Need?
Any amount of life insurance is better than no life insurance at all, so just buying enough life insurance to comfortably fit in your budget is a good starting point. How far your budgeted amount can go for life insurance will also depend on the type of policy you buy, your age, and your health.
The common rule of thumb with how much life insurance you need is 8x to 10x your annual salary. This means that if you have a salary of $75,000, you would need a life insurance policy of $750,000, which may be more than what you were expecting. This is a good starting point that would likely cover most of your needs, but it’s good to break down all of your expenses.
You’ll want to make a list of all debt and expenses that you have to make payments on, which may include:
- House mortgage
- Car loans
- Credit card debts
- Annual living expenses for any dependents
- Future education expenses
- Final expense and burial costs
You’ll want to prioritize which of those are the most important to your family and your situation and include those.
For annual living expenses for your dependents, this amount could end up being the largest number because it will depend on how long you want the death benefit to support them. Ten years just of annual living expenses could easily be over $300,000, which can have a big impact on your life insurance death benefit amount.
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Do You Need Life Insurance for a Mortgage?
Your mortgage payment is likely one of your largest monthly expenses, so it makes sense to start with factoring in your mortgage when considering how much life insurance to buy. There is a separate type of mortgage life insurance that you can buy, but in most cases it makes more sense to just factor in your mortgage amount into your total death benefit amount.
Mortgage life insurance is similar to term insurance in that it remains in effect for the length of your mortgage. If you pass away prematurely, the life insurance company will directly pay off your mortgage, which means the money will not go to your beneficiaries.
However, your premiums for a mortgage life insurance policy remain the same for the entire length of your mortgage, even though your mortgage amount is reduced with each payment you make. This reduces the value of mortgage life insurance in the long term, since you’re paying the premiums for a full mortgage amount but maybe have already paid into your mortgage for 20 years.
Mortgage life insurance can be useful for some people, however. It’s typically guarantee-issue, which means you won’t have to take a medical exam or pass an underwriting process. This can make mortgage life insurance valuable for people who have underlying or preexisting medical conditions, or for people who work in risky occupations who are having difficulty buying standard term life insurance.
If you’re able to buy regular term life insurance, that’s the better option because the money will go directly to your beneficiaries and the value of the policy will remain the same. But if you can’t buy term life insurance, having mortgage life insurance can help your dependents deal with one of your largest monthly payments.
How Much Is Life Insurance?
The cost of life insurance largely depends on your age and health status, along with the type of policy that you buy and the benefit amount. Additional factors include your family’s health history, your occupation, your driving record (risky drivers are considered more likely to be involved in a fatal car crash), and whether you are a smoker or not.
Healthy people in their 20s or 30s could reasonably expect to pay between $200 and $500 a year for a term life insurance policy worth up to $500,000. Permanent life insurance policies worth the same amount may be between $1,000 and $1,500 a year, but the exact cost will vary considerably based on your personal factors and the life insurance company you’re getting a quote from.
The Benefits of an Independent Insurance Agent
Life insurance is a simple concept, yet all the available options you can buy can be confusing and complicated. Enlisting the help of an independent insurance agent can make all the difference in the world. An independent insurance agent will break down each option and can guide you in helping you make the right decision for you and your loved ones.
Your agent will also be there if you do have a claim. If you’re not around, your trusted independent insurance agent can be the one to guide your loved ones through the claim process and deliver the benefit amount, which at that moment will give all your life insurance payments much more meaning to your loved ones.
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