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You typically need life insurance if you have dependents who rely on your income. However, there are reasons to buy life insurance even if this scenario doesn't apply.
You may be at an age where you have never had to think about life insurance. Or maybe you've thought about it several times but have been too overwhelmed by the choices, industry jargon, and potential costs to know where to start. Let me just say: you are not alone.
Life insurance is a good move for everyone, from your single friends to your wealthy neighbors. So let's start with the basics.
Life Insurance 101
Life insurance sets out the terms of an agreement under which your insurance company will pay a sum of money to whoever is listed as a beneficiary if you die during the term of the policy. In return for this eventual payout, you will pay the insurer a monthly premium for the term of the policy.
That sounds like a lot, but the gist is this: you pay the insurer now to ensure a payout later. This means you have security now and your loved ones receive financial support later. Where things get complicated is choosing the type of life insurance you want, estimating the amount you need, and generally gathering all the information you need to apply.
Types of Life Insurance (Term vs. Whole Life Insurance)
There are two basic types of life insurance: term life insurance and whole life insurance.
Term life insurance covers you for a specific period of time, such as 10 or 20 years, and during that time you pay a fixed monthly payment. If you die during the term, the life insurance will pay out the death benefit. If you do not do this, the policy will terminate at the end of the term. This type is suitable for most people.
Life insurance is more complicated. Whole Life insurance covers your entire life for a monthly premium. However, it is much more expensive and the additional premiums add up in what is known as “cash value”. This cash value can be used for a variety of purposes, including paying future premiums and allowing you to borrow against the policy.
Most people will find the best value in a fixed term. The whole life costs more and has conditions like a cash account that most insured people never need and will never use.
To learn more, here is a deeper dive into the differences between term life insurance and whole life insurance.
Factors that influence your needs
To figure out how much life insurance coverage you need, you need to figure out what your family would need in the event of your death.
It is common for life insurance to cover a portion of living expenses until the youngest child is an adult, enough to pay off the house and often enough to send the children to college.
For example, if you want to provide a monthly income of $4,000 for 10 years, pay off the $220,000 mortgage, and set aside $50,000 for college, you would need a $750,000 policy.
If you're unsure, one option is to insure 10 times your annual salary.
Once you've determined the amount, you'll want to decide how long you'll need the coverage for. Often people want coverage until their youngest child is an adult, but your specific situation may be different.
Learn more about how to figure out how much life insurance you need here.
Factors affecting price
You probably know that insurance companies base life insurance premiums almost entirely on your age. However, other factors also come into play, such as your gender, your weight, your medical history, your family health history and whether you use tobacco products.
Your premium will also be influenced by the type of insurance you choose and the amount of coverage you want.
Consider this breakdown of the cost of term life insurance by age and gender:
In general, the older you are, the higher your premium will be, simply because you pose a higher risk to the insurer of having to pay death benefits to your beneficiaries. Luckily, there are a number of affordable options to suit your needs at any age.
Life insurance needs by age
No two life insurance policies are the same because we all have unique needs depending on who we are and what is going on in our lives. But how do you know what you really need? And what should you consider, even if you think you don't need it? Here are some things to keep in mind depending on your age group.
Young adults (20s and 30s)
This is when you are most likely to need life insurance. In your twenties and thirties you are most likely to have to take care of your family and have not had much time to accumulate much wealth. So if you die, your family could be in a very difficult situation.
Fortunately, the younger you are, the cheaper life insurance is. Buying life insurance while you are young and healthy is beneficial for another reason besides price. Certain health conditions may render you uninsurable. If you are diagnosed with any of these conditions during your life, you will not be able to get life insurance at all.
So if you're in a position to purchase it and know you'll need it in the future, it might be a good idea to get life insurance now.
What if I'm single? Purchasing life insurance can still help protect your loved ones from financial burdens (such as burdensome student loans) resulting from your death. Even if you are not a partner, family members, charities or even business partners could benefit from your financial support in the event of your death. Plus, you may need it in the future, so it's best to get it while you're young and healthy.
What if I already have life insurance through my employer? Group life insurance is typically offered to employees at little or no cost. Often referred to as “basic” life insurance, coverage is available to you automatically (regardless of your medical history), but amounts are typically capped at a low level (e.g., one or two times your annual salary).
There is no reason not to take out group protection, but I recommend taking out life insurance as well. This is because employer coverage typically does not provide the same coverage for your dependents and your coverage is entirely tied to your workplace.
Related:
The 10 Best Online Life Insurance Companies
Middle age (40s and 50s)
As you age, you are likely to accumulate additional assets. This could be wealth you have built up or a mortgage or other debt that needs to be paid off. You may also develop various health problems that increase the cost of your life insurance premium. You should re-evaluate your insurance coverage as your lifestyle and family dynamics change.
What if I don't have any dependents? It may seem silly to purchase insurance with a death benefit if there is no one there to receive the money when you die. The thing is, most people have someone in their life that they want to support in the event of their death. And even if you don't have dependents, there may be elderly parents who could use the financial assistance to pay for their care when you're not around.
What if I am independently wealthy? If you are wealthy, consider life insurance as a way to pass on your wealth. Tax laws favor life insurance: policyholders with assets of up to $13.61 million (individual, more for married couples) in 2024 are exempt from inheritance tax if they leave that amount to a beneficiary. Contact a tax advisor to discuss your options.
Seniors (60 and older)
If you don't have life insurance at this stage of your life, you should definitely consider talking to someone about your options. Depending on your age and health, you may have fewer options and will almost certainly incur higher premiums. Therefore, it is advantageous to start early. If your primary concern is covering the cost of a funeral or memorial, you may only need “final expense” insurance. Since this type of policy is specifically designed for older policyholders, no medical examination is required when applying.
What if I'm retired? A lot changes in retirement. If you had group insurance through your job, it ended either on or shortly after your retirement date. If you have additional insurance, you should consider either extending your term insurance or converting it to a permanent policy to cover your costs after your death.
What if I already have a pension? Federal pension law requires that private pension plans continue to provide a pension to the surviving spouse of a former employee if the employee has earned a benefit. However, there are situations in which your spouse or other dependent is unable to receive your pension after your death. Since life insurance is designed to cover loss of income, check the fine print of your retirement benefits and consider purchasing supplemental life insurance to cover any gaps in your retirement income.
Related:
How does life insurance payout actually work when you die?
Conclusion: Do you need life insurance?
There are many benefits to life insurance that balances what you need and what you can afford. And ultimately, how well do you want your loved ones to be cared for when you are no longer there?
The only situation where you may not need life insurance is if you do not plan to ever have dependents (children or a partner) or take out a mortgage, and your estate can be settled with the assets in your name upon your death. But still, no one can see the future unless you have unlocked some hidden talents. Why not prepare now in case something changes in the future?
Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
