Have you considered how much life insurance you need?
This is a simple question without a one-size-fits-all answer. Before trying to answer that question, first consider why you need life insurance in the first place. Life insurance is there to replace your income if you die. It is there as a financial benefit for your survivors, or beneficiaries. But what if you are single and no one is financially dependent on your income – should you still buy life insurance? Do children need life insurance? Let’s look at a few situations.
Do You Need Life Insurance?
Not everyone needs life insurance. If you don’t have anyone financially dependent on your income, then you may not need it. Here are some rough guidelines, but keep in mind that there is no one-size-fits-all approach to life insurance.
When you NEED life insurance
Life insurance is there to replace your income if you die, so if you have anyone relying on your income, then you need life insurance. If any of the following situations apply to you, then you probably need life insurance:
- You have dependents (children, spouse, partner, parents living with you, etc.)
- You have a mortgage or other large debts
- You have a large or complex estate
- You own a business or have a partner in a business
Life insurance can be used as a tool for estate planning and can be useful for avoiding probate and/or taxes in certain situations. If you have a large or complex estate, then you should meet with a lawyer or estate planner to help you determine the best course of action.
When you may not need life insurance
You may not need life insurance if:
- You have no financial dependents and probably will not in the foreseeable future
- You are retired and living off investments or other income sources and your spouse or other dependents will have enough income from those sources if you pass before him/her
- Children almost never need life insurance. The only time it makes sense to get life insurance on a child is if they are earning income and that income needs to be replaced if they die.
Note about children’s life insurance: Some life insurance companies will offer a rider on an adult’s policy that gives your child a few thousand dollars coverage, and depending on the company, may guarantee the child coverage after they turn age 18, regardless of their health. The life insurance company I use offered $20,000 coverage for my daughter for an additional $2 per month on my life insurance policy, and the guarantee she would be eligible for coverage after age 18, regardless of health. Use your own judgment on this type of plan.
No dependents, no life insurance?
Here is a common situation: You are young and single, or you are a newly married couple where both spouses work (dual income, no kids). Do you need life insurance?
There are two sides to this argument – some say, yes, buy life insurance regardless of whether or not anyone is financially dependent upon your income, and others who will say not to bother. As with everything, there are different ways to look at this.
If you are young you can usually buy a term life insurance policy cheaper now than you can a few years down the road. The benefit of this is you can lock in lower life insurance rates, and you will already have coverage in place if something were to happen that would leave you uninsurable. (See why term life insurance is almost always better than whole life insurance).
Automatic/inexpensive group life insurance through work. My current company offers life insurance as part of our benefits, with a policy payout of 2x annual salary (we can purchase more at our expense). When I was in my early twenties I had a $10,000 policy through the military (SGLI), which was enough to pay for any incidental burial costs my family might have faced (I was in the USAF at the time, so I would have had a free military burial; the $10k policy was “just in case” and only cost $0.80 per month). I didn’t see the need in getting a larger policy because I was single and had no dependents.
What are your thoughts about who needs life insurance?