Life Insurance – Who Needs It?

Life insurance can be a good estate planning tool. And while I’m not an estate planner — nor do I sell life insurance — I also know that it can be something that’s not always necessary. So how do you tell who needs it? Let’s start with a few basics, beginning with what it’s not for.

What life insurance isn’t for

It’s not a way to save or invest for the future in general, or for your children’s future. It’s not a way to save for college, even though people who sell whole life policies might suggest so. (Invest instead.)

It’s not generally for kids at all, unless they’re major income earners in your family, you suspect they may be uninsurable later in life due to some hereditary disease, or you don’t have enough money at all to pay for funeral expenses if they die. No one wants to contemplate any of that, but those are pretty much the only reasons I can think of that a child might need it.

What life insurance is for

Life insurance is there to protect the folks you leave behind from financial hardship, and it can of course also be used to pay for your funeral expenses. You don’t have to take care of your loved ones forever after your death, or leave them extremely wealthy, but it is absolutely responsible to leave enough money behind so that they aren’t plunged into poverty or stressed out financially upon your death.

You can also do that, of course, by having a significant amount of money in investments — enough for the loved one(s) who are financially dependent on you to replace the income you earned with the income those investments generate. So life insurance comes into play when your investments aren’t yet at that level. Once they are, you can self-insure if you want to — just by virtue of having those investments.

Look at your situation

More than anything, taking a look at your individual situation can help you to decide whether or not you need life insurance. Ask yourself the most obvious question first: if I died today, would any of the loved ones I leave behind have financial troubles because of my death? In other words, is anyone depending on your income or the work you do on a daily basis right now?

If you have kids who not yet out on their own, that answer is probably yes. If you’re married and you and your spouse depend on your income to make the monthly budget, again, that answer is probably yes. But if you’re a single person and you’re not supporting anyone else, it’s probably a no. Those yeses or nos are usually your answer to whether or not you need life insurance.

And when it comes to deciding what type of life insurance you need, I can’t think of any reason to choose anything but term, both because it’s inexpensive and because most people don’t need it forever. (Here’s an article that goes into that in more detail.)

So if you haven’t yet considered this, now’s a good time to make doing so a part of your estate planning process. It’s simple to do, and the gift of planning ahead is a wonderful thing to do for those who are left behind if the worst happens.

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18 comments

  • My wife and I both have term life insurance. It’s relatively cheap, and in the event that something happens to one or both of us, the kids and/or the surviving spouse will not have to worry about money for quite a while, if ever. If you have kids, and you don’t already have a net worth in the millions, you NEED to get adequate life insurance in case something ever happens to you!

    • I have term life insurance as well. It’s definitely an important part of estate planning if you don’t already have a ton of investments & cash in the bank.

  • You also need to evaluate based on life events. I think I’m all set for right now, but if I have major health issues come up, get married, or have kids, I would definitely re-evaluate.

    • If you have major health issues come up, you may not qualify for life insurance (and especially not disability insurance) any longer. Or if you do, it might be at a very high rate.

  • We chose our insurance agent because C once heard him talking to someone else who was interested in insurance, a 20 something guy who thought he needed life insurance. The agent asked him- Are you married? Do you have children? Do you have younger siblings you think you’ll need to support? When the answer to all was “No”- he told the guy- you don’t need life insurance.
    C figured an agent who was willing to talk someone out of insurance they didn’t need was a good agent. He’s been our agent for 9 years now, and we’re still happy with him.

  • Term insurance is like renting while permanent insurance is like owning. Rent the life insurance if you can’t afford to own and just need the protection (i.e a young family). However, owning a policy and the cash value may be more appropriate for your situation. It’s more expensive, but so is owning your home. Talk with a good agent (I am not one and don’t sell insurance) to see what type of policy is best for you. Regardless, life insurance can be a critical component to help take care of a family if something tragic happens to one spouse or the other. Give your family the peace of mind they deserve and make sure they are protected in the future. Great post!

    • Hm, I don’t see the comparison myself, unless you mean that term is for a set period of time and whole life is for “forever”. (But, I’m not sure why anyone would need life insurance for forever…)

  • David Strickland

    I do sell life insurance for a living and there are two schools of thought…permanent is right for some, term is right for some…remember the main reason for life insurance is to help with security of your loved ones…that might mean paying off bills, or college or in some cases estate taxes…income truly is a big factor in the purchase…you can also purchase a term policy that can be flipped to a a permanent at anytime during the term…How bout this, you are in the last year of your term policy and you are giving the bad news that you are terminal, but you will outlive your term policy..thats where permanent or a term with a clause to move to permanent at anytime comes in handy….just some thoughts…

    • I would think that your savings and investments have more to do with it than income, since if you have enough of those to support your family if something happens to you you would be able to self-insure.

  • I *never* looked at life insurance seriously until I had children. Once you have someone else who depends on you entirely for their security, it takes life insurance to a whole new level. It becomes something necessary – a duty, an obligation, a responsibility.

    • I think that’s exactly the point at which you need it. And leaving some financial protection for your kids is the responsible thing to do.

  • As an independent life insurance agent, I thought it would be beneficial to discuss a reason why permanent coverage may be appropriate in certain situations. As I specialize in coverage for seniors, let me give you a situation that has been coming up more and more as retirees find their pensions reduced by poor investments and very low interest in bank instruments.

    On average, a female spouse lives about 5 1/2 years longer than her husband. One way to protect her would be to purchase a permanent policy. If healthy, a 60 year old male would have a 26 year life expectancy, and leave a tax free benefit to his spouse equating to a 5.58% rate of return. Of course, the return would be higher or lower based on actual lifetime.

    The point is that there are substantive reasons to examine permanent coverage.

  • David

    Hi Jackie. I gave up my term insurance three years ago on my wife’s advice. She’s a banker. It was only good to age 70. I have an accidental death life insurance policy for $1 million and my wife has coverage on me through her work. I’m 56 and still working – to age 65. We have investments, no debt and no mortgage. Our kids are in college. First question – should I still have a life insurance policy for $50 K to bury me, etc, in case my wife leaves her job? 2nd question – would investing $250 a month be smarter to achieve this, rather than paying an insurance agent?
    Thank you for your help

    • Hi David, are burial expenses the only thing you would need the insurance coverage for? If so I guess it would depend on how inexpensively you could get the term insurance — it should be a whole lot less than $250 a month, that’s for sure. Do you have a good amount of savings already? Regardless of what you decide, I would absolutely invest regularly. (As a side note, you could have an awfully fancy funeral for $50K, so I doubt you would need that much for that purpose.)

      • David

        Hi Jackie. There are a couple of health issues so I doubt life insurance would be cheap. Yes, we have investments – a good amount of savings. At some point my wife will quit her job and then I only will have the accidental death policy. Should try to set up life insurance on myself and if so what amount and what is a good rule of thumb for how much to pay? thanks, David

        • If your savings and investments are likely to generate enough income (without touching the principal) to support your wife if you die and she is no longer working, then if it were me I’d feel comfortable self-insuring. It’s been a long time since I bought life insurance, so I don’t know what a good price would be. I would talk with a fee-only professional that’s familiar with your situation to get an idea of what amount of life insurance you might need. I also found this calculator online that might help: http://www.smartmoney.com/personal-finance/insurance/how-much-life-insurance-do-you-need-12949/