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How to Know if You Need Life Insurance

This article was written by in Insurance. 13 comments.

Not everybody needs life insurance. For others, it’s a critical part of financial security. Here’s how to determine if you need life insurance.

It’s no secret that insurance companies make money primarily by not providing benefits to their customers. This is why insurance gets expensive if you’re risky to insure. The more likely an insurer is to pay you for a claim, the more you’ll pay up front in premiums.

That’s just the way business works in the world of insurance.

With that said, this is no reason to avoid insurance altogether. Yes, you may pay for car insurance you never use. But you’ll be mighty glad to have it if you get into an accident. On the other hand, if you don’t drive or own a car, paying for car insurance would be silly. Even if you’re riding with someone else in their car, you don’t need to own car insurance.

So, really, the key to making insurance work for you is to know what you need and when you need it.

This brings us to the topic of life insurance. With other types of insurance, it’s normally easy to tell whether or not you need coverage. Drive a car? Get car insurance. Own a home? You need homeowners insurance. Life in a major flood plane? Flood insurance is a must.

But just because you happen to be alive doesn’t actually mean you need life insurance.

To determine whether or not you need life insurance, you first need to understand what it’s for. Then, you can figure out whether or not you need it.

What is Life Insurance for, Anyway?

Life insurance can be tougher to wrap your head around because the event you’re insuring against is your own death. That’s not something we like to think about on the best days. So life insurance can seem a little morbid.

The key here is to understand what your life insurance policy is actually for. Hint: It’s not for you!

Any other type of insurance you purchase is primarily to protect yourself. But life insurance doesn’t protect you at all. After all, to cash in a life insurance policy, you have to have passed away.

Life insurance is primarily meant to protect those you leave behind. This is often a family that includes minor children. But it could also mean your parents, your husband or wife, a close friend, or even your dog. (Though I wouldn’t necessarily recommend getting a life insurance policy with only your pooch in mind.)

When you die, you’ll leave behind people who will, at a minimum, have to tie up the loose ends of your estate. That’s just a fancy word for your possessions, accounts, and remaining debts. Even if you aren’t rich, you have an estate, and someone will have to deal with it when you pass away.

This usually means planning and paying for a funeral and burial costs. It may also mean settling your debts, selling what’s left over, or passing possessions to others, as your will specifies.

Bottom line: settling an estate can get expensive if you aren’t prepared. And you don’t want to put those costs on your loved ones.

Beyond just settling your estate, of course, there’s the idea of providing for those who depend on you. If your family depends on your income each month, you need to be able to replace that for them for a while. Most of the time, you want that income replacement to last at least until your children are self-supporting. And you may decide to cover additional costs, such as college funds.

So Who Needs Life Insurance?

Now you know what the purpose of life insurance is. But do you actually need it?

Well, if someone–whether a child, spouse, parent, or anyone else–currently depends on you for income, you definitely need life insurance. You’ll need coverage that lasts until:

  1. That person (or those people) don’t depend on you any more for income, or
  2. You have enough money saved to cover their needs should you pass away.

What if no one directly depends on your income? In this case, you may need life insurance. You’ll need some coverage if:

  1. You don’t have enough money in savings to cover end-of-life costs, or
  2. You have debts that would be difficult or impossible to settle out of the proceeds of your estate.

If B applies to you, life insurance is even more important if someone else is a cosigner on your debts.

For instance, what if your parents have cosigned a private student loan? Some lenders have the contractual option to call the full loan balance due as soon as either cosigner passes away. So your cosigner could have to deal with not only your death, but also this loan balance that is now suddenly due in full.

For this reason, it’s a good idea to maintain enough life insurance coverage to cover your potential end-of-life costs as well as any outstanding debts. This just makes life easier for those who are left to pick up the pieces should you pass away.

How Much Life Insurance?

How much life insurance you need depend largely on you reason for buying such insurance. We won’t go in-depth about how to make this calculation here. For more on that, check out this article.

For now, we’ll just break down the “how much” into two categories, based on our scenarios above.

In the first scenario, you’re getting a life insurance policy because someone depends on your income. In this case, you’ll need enough coverage to provide your beneficiary with the same amount of money for a certain length of time. You may want to provide the income for ten years, until they’ve graduated college, or some other length of time.

The amount of time will depend on your situation and on how big a life insurance policy you can afford. Remember, you can always layer policies, as well. If you can’t afford a $1 million policy today, maybe you can start with a $250,000 policy. As your financial situation improves, you can continue to increase your coverage or add additional policies to reach your target amount.

What about in the second scenario? Here, with no one dependent on your income, you can likely get away with much less coverage. That means your policy could be incredibly cheap on a monthly basis.

If your goal is to use the policy just to cover your end-of-life expenses and outstanding debts, total up your debts and add $5,000 to $10,000 to cover end-of-life expenses. You may also opt for a shorter term, so that your coverage ends when you’re debt-free and have money in savings.

As I said above, determining whether or not you need life insurance can sometimes be tricky. But most people would benefit from at least minimal coverage at some points in their lives. And the good thing is that for most people, a decent term life insurance policy will only cost a few bucks a month!

Published or updated September 13, 2017.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar 1 Anonymous

Flexo, I don’t think you have a handle on the Progressive case and more generally how underinsured motorist coverage works. From what I read, fault was not clear. The other insurance company didn’t figure it was clear – they paid because their policy limits were low and the death of the other driver. A business decision. Because of disputed liability Progressive didn’t pay. This is because they didn’t think it was legally owed. If their policyholder was at fault they weren’t entitled to collect (and would have actually gotten a windfall from the settlement from the other driver). In these cases, they stand in the shoes of the alleged at-fault party, but they don’t actually defend them. It is adversarial. The trial determined that the other driver was at-fault and Progressive now has to pay. If Progressive thought the other driver was at-fault they could have paid this without the trial. In hindsight, they wish they would have paid this. Of course, if they won the case – we wouldn’t be having this discussion. In summary, this is not a case of an evil insurance company not paying something that is clearly owed under the policy. This was a disputed claim that went through the process for resolving it. (disclaimer: I worked for Progressive about 15 years ago.)

Otherwise, life insurance is a very good think. My mom died when I was in college and thanks to her having adequate coverage my siblings and I were able to finish college and keep the family home. My mother was an insurance agent, and clearly knew the value of life insurance.

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avatar 2 Luke Landes

Tom,

Thanks for sharing that. It’s interesting to see the case from the insurance company’s perspective.

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avatar 3 Anonymous

Being retired, I have also given up life insurance as a part of my financial planning. With my pensions providing survivor benefits to my wife in the case of my demise the need for protecting income is gone. Both of my pensions could continue to pay her 75% of what they pay now and Social Security will insure she gets at least the value of my social security benefits. When younger we went the term-life route to replace lost earnings/assets and never got involved in the “life insurance-as-saving” side of the equation.

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avatar 4 Anonymous

I pretty much feel this way too. I do have an expensive highly leveraged house though and a SO that will likely continue long term. For that reason I am considering some form of life insurance. I would like to think that if either of us passed the other would have it fairly easy (o at least debt free). Also there is the question of age. I am pushing 40 now and premiums will start to escalate, it could ,make more sense to pick it up now rather than later for that reason alone.

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avatar 5 Anonymous

You can also get life insurance as an income stream, so you don’t have to worry about market fluctuations

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avatar 6 Anonymous

I have life insurance with the company for which I work, but that’s it. I don’t have children yet so don’t see the value in being covered even more. If I died, my work would provide a fairly large sum to my common law partner with which he would be able to live for at least 4 years without working.

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avatar 7 Luke Landes

I your life insurance plan with your work portable? If you lose your job, I’d hate for you to lose the coverage you’ve purchased through you premiums.

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avatar 8 Anonymous

Getting a quote on term life insurance is very easy with no contact to a sales person.

There is a site called http://term4sale.com/

You put in your location, age, general health condition and type of term you want and it spits back dozens of going rates from some of the most highly used insurance companies.

When I purchased a 20 year, 750K policy 8 years ago this site spit out the exact premium cost to the penny of what I paid for the policy and company who wrote my policy which I purchased via an insurance broker.

Anyone wanting an idea of what insurance would cost them should check out this site. I check the site for updates on premiums in case I would want to take out a different policy regularly. I don’t know how they make money and I have no affiliation with the site.

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avatar 9 eric

Thanks Apex. Good website to reference!

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avatar 10 Anonymous

As you read on my blog today, I don’t have it right now and don’t need it right now. If I ever do have a kid I will buy it though.

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avatar 11 Cejay

I have life insurance bough through my company at pennies. Since our house is paid for , we have no other debts and have no children or obligations we really have no need for much insurnace. We mainly have the coverage we have since it is very cheap and we will have it in case we need to take a sabbatical or something similar.

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avatar 12 Anonymous

I’ve always tried to use my own judgement when buying any type of insurance from insurance companies. It’s best for each of us to do the research (with some guidance if necessary) and come up with the best solution for our situation. I too am single with no dependents, am completely debt free and have a few assets to my name. I’m not rich by any means, but I do have a small amount of insurance coverage through my employer (since I don’t have to pay for it) which will cover any funeral and burial expenses. I would also like to leave my siblings and nieces/nephews with a little money when I’m gone. But that’s just a personal thing.

For the most part I agree with your points. Insurance companies, like in Progressive’s case, don’t always have the interest of the insured consumer at heart. Three years ago, I was in a major car accident that totaled all 3 cars. The driver ran a stop light and crashed into a car, that spun into my lane and crashed into me. As luck would have it, they weren’t insured and I had to pay for everything. Shortly afterwards my premiums went up (even though I was not at fault) only because I had to claim the incident. I shopped around for a new company after that.

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avatar 13 qixx

I have life insurance through work. It is not portable and will go away when i leave my current employer. i know this and include it in my negotiation package. Other than that i have no other coverage. When i can’t get it or between jobs i don’t carry life insurance. I am not one to gamble against myself.

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