Do I Need Life Insurance?

Who Needs Life Insurance?

Life insurance can provide your survivors key financial assistance in the event of your death if you have a spouse, partner, children or other dependents who rely on your income. According to the Life Insurance Marketing and Research Association (LIMRA), nearly half of American households say they would face financial hardship within six months if a primary wage earner were to pass away. With that in mind, life insurance could be critical for the following:

Those With Children or Other Dependents

One of the main reasons to get life insurance is to protect your loved ones from severe financial disruption. The policy's death payout could be enough to ensure your children, relatives or others could either fully or partially replace your income and pay required bills. Beyond that, it can also provide money for future financial goals you intend to pay for, such as your child's education or wedding.

Married or Partnered Individuals

If you and your spouse or partner share household expenses, the death benefit could make sure your partner can continue to pay the bills. Without life insurance, they may be unable to pay the mortgage, for example, and be forced to relocate and change their lifestyle.

Stay-at-Home Parents and Spouses

Even if no one relies on you for income, the work you perform for your household has financial value that could be hard to replace. If you manage your household full time, including child care, meal preparation and home maintenance, then a policy could provide money to help cover those services if you pass away. A recent Care.com study found that parents are spending 22% of their household income on child care, proving just how valuable those household contributions can be.

Small Business Owners

You may want to consider getting life insurance to help the company stay financially stable if you pass away. For example, the policy coverage could help pay for business loans, invoices, rent and other vital expenses the company needs to continue operating.

Life insurance can give your business partner the money to buy your share of the company if you pass away, without putting extra strain on them or the business.

Cosigners and Co-Borrowers

If someone shares a loan with you, like a cosigner or joint account holder, they could still be responsible for the outstanding balance after you're gone. And in states with community property laws, your spouse or partner may have to cover debts that weren't in their name. In that case, you may want life insurance to help pay off those balances so your loved ones aren't left footing the bill.

Who Doesn't Need Life Insurance?

If you are single, healthy and no one is relying on your income, life insurance may not be a priority. In that case, your time and money is probably better spent on paying bills and building a solid financial footing for your life. Without a spouse, partner or children to provide for, your death would be a personal loss to loved ones but not a financial one.

Similarly, if you're older and your income and assets are just enough to cover your expenses, getting a life insurance policy to leave a legacy for your heirs may not make sense. In fact, it could do more harm than good if the cost strains your finances. Ideally, you'll have enough assets to cover your final expenses, but if not, you can purchase a final expense policy to cover the funeral and related costs.

Types of Life Insurance Policies

There are several different types of life insurance policies, but they all fall into two main categories: term life and permanent life.

Term Life Insurance

Term life insurance is basic, no-frills coverage designed specifically to provide a death benefit for your beneficiaries after you pass. The policy is active for a certain period (term), ranging from one to 30 years, or up to a certain age, as long as you pay your premiums on time. Your beneficiaries will receive the coverage amount if you pass away while the policy is active.

Permanent Life Insurance

Unlike term insurance, which only lasts for the specific time period you choose, permanent life insurance stays in effect for your entire life. This usually means it remains in effect up to age 99, as long as you continue paying premiums. Permanent policies, which include whole life and universal life insurance, also build cash value that you can withdraw or borrow against. Remember, however, that the remaining balance reverts to the insurer when you pass away. If you want to leave it for your heirs, you may be able to apply that amount toward a higher death benefit, but check with your provider to make sure that's an option.

Deciding which type of policy is best for your situation generally comes down to the cost and term. If you want more affordable coverage and only need it for a certain time frame, such as until your children are grown and no longer need your financial support, you may prefer term life insurance. But you may prefer permanent life insurance if you don't mind spending more for a lifetime policy that builds cash value.

How Much Life Insurance Do I Need?

To determine how much life insurance you need, you can use tried-and-true formulas that provide a quick estimate. You can also take a more thorough look at your family's current and future financial needs to come up with a more accurate number.

Multiply Method

One quick way to estimate your life insurance needs is to multiply your yearly income by the number of years family may need financial support. When calculating your income replacement, make sure to include health insurance, your employer's retirement plan contributions and other financial benefits on top of your paycheck.

DIME Method

Another formula is called the DIME method, which adds up your debt (D), your income multiplied by the years your family will need support (I), your mortgage (M) and your children's education costs (E). The total of these amounts gives you the coverage you may need.

Assets vs. Obligations Method

These formulas give you a quick way to get a rough estimate of the amount you'll need. But if you really need to get down to brass tacks, subtract your obligations from your assets in more detail.

• Liquid after-tax assets: Add up all of your savings accounts, retirement funds, Social Security benefits, existing life insurance and any other assets your family would need.
• Household expenses and debt: Total up your monthly bills, including your mortgage, utilities, child care, food, transportation and debt payments.
• Other costs you want covered: Factor in funeral and burial expenses, plus future costs such as college tuition for your child or children.

Once you add up these expenses and debt obligations, subtract that number from your liquid after-tax assets to help determine how much coverage you might need. Then multiply that number by the number of years your family will need support. Let's say you have $80,000 in annual household expenses and debt and your dependents would need that amount, $1.6 million in all, for 20 years. If you have $400,000 in liquid after-tax assets, you would need $1.3 million in life insurance to cover the difference.

Learn more: How Much Life Insurance Do I Need?

How to Get Life Insurance

If you decide it's worth it to have life insurance, here's how to get the coverage you need at an affordable price.

1. Calculate How Much Life Insurance You Need

In general, subtract your total monthly household expenses, your family's present and future financial needs and final expenses from your liquid after-tax assets to get a rough death benefit estimate. Your assets may include your savings, retirement accounts, pensions, Social Security survivor's benefits and life insurance policies.

2. Decide What Type of Life Insurance to Buy

Term life gives you low-cost coverage for a set period. Whole or universal life is more expensive but lasts your lifetime and helps you build cash value over time.

3. Get Multiple Life Insurance Quotes

Shopping and comparing quotes based on the same coverage types and amounts can help you compare apples to apples and find the most affordable provider. You can gather quotes at insurers websites, over the phone or by using life insurance comparison platforms. Alternatively, you could work with an independent insurance agent that sells policies from several insurance companies.

4. Apply for the Policy

Once you've settled on the right policy, fill out an application with the insurer or through an agent, whichever you used to find the policy. You'll need to give some personal, health and financial information so your insurance can assess their risk and calculate your premiums. You may also be required to complete a phone interview and medical exam.

5. Review the Terms and Finalize the Policy

If the provider approves your application, review the coverage and premium amount carefully. The policy becomes active once you accept the terms and make your first payment.

Tip: Ask your insurance agent if there are life insurance riders you can add to your policy that might fit your situation. Riders are optional add-ons to your policy that provide extra benefits. For example, if your family health history includes serious medical conditions, you might consider adding a critical illness rider that allows you to access part of the policy's death benefit while you're still alive.

Frequently Asked Questions

Good Credit May Help You Save Money on Life Insurance

Life insurance can be a valuable option to protect your family from financial hardship if you were to unexpectedly pass away. You should strongly consider a policy if you have dependents or others who rely on you financially. On the other hand, you might not need life insurance if no one depends on your income or if you've built enough savings and assets to cover their needs.

If you decide to get life insurance, get quotes from several providers to make sure you're getting the best balance of price and coverage. Life insurance can provide a major financial cushion in the event of your death, but a policy shouldn't compromise your financial health while you're still alive.

Also, keep in mind that life insurance companies can check your credit-based insurance score when reviewing your application and calculating your premiums. These credit-based insurance scores aren't the same as the ones lenders use, but they are based on many of the same factors. With that in mind, make sure you practice strong credit habits like making your payments on time and keeping your balances low. That may help improve your credit-based insurance score and save money on your premiums. Before you apply for a policy, it's wise to see where your credit stands by checking your credit report and FICO^® Score^Θ for free with Experian.