Updated August 21, 2019

Do I Need Life Insurance

Read more about Life Insurance

At what age should you get life insurance and is it worth it? Read on for some surprising reasons you might still want life insurance (even without dependents).

© CreditDonkey

Life insurance provides financial security to loved ones if you pass away unexpectedly. It can help with:

  • End-of-life expenses like funeral costs and medical bills
  • Paying off bills and debts, including a mortgage
  • Taking care of children and other dependents
  • Leaving an inheritance for your beneficiaries

No matter your age or circumstance, life insurance is a key piece of your financial future, one that many overlook. And the best time to get coverage is usually when you are young and healthy.

Only about 60 percent of people in the U.S. owned life insurance in 2018. One in 5 said they did not have enough coverage.

Who Needs Life Insurance?

The purpose of life insurance is to provide a financial safety net for your loved ones after you die. Consider these questions:

  • Are you married?

  • Do you have children?

  • Is there anyone else who relies on you financially (perhaps an aging parent or sick family member)?

  • Do you have student loans, credit card debt, auto loans, or a mortgage?

  • Do you have a co-signer of a loan?

  • Do you have enough money in your savings account to pay funeral costs and/or other end-of-life expenses? (NOTE: The average, basic funeral costs around $10,000, according to the National Funeral Directors Association.)

  • Do you want to leave an inheritance to someone after you die?

If you answered yes to any of these, you may need life insurance.

Is there a time life insurance ever be required?

There is usually no legal requirement to have life insurance. However, some states require it during a divorce, particularly if you have children. This requirement means purchasing separate life insurance policies and naming the ex-spouses as the beneficiaries to ensure children are provided for.

Rules around legally required life insurance varies from state to state, so you should check with a legal professional or life insurance agent to learn more.

Some Common Scenarios

Let's examine some scenarios that may apply to you.

If you are single
Just because you don't have a spouse or children doesn't mean you don't need life insurance.

Crazy as it sounds, dying costs money. The average funeral is $7,000 - $10,000. Depending on your state of health when you die, you may have outstanding medical costs, including copays, coinsurance, and/or deductibles.

These costs will fall on your family or loved ones. The same may be true of student loans, auto loans, or credit card debt. Your insurance death benefit can contribute to paying off these expenses.

If you are married
You and your partner likely share a variety of expenses, from mortgages to utility bills, groceries, and other bills. If you both work, you probably share the load of household chores, like cleaning, cooking, and laundry.

If you or your partner passed away, the surviving person may struggle to pay bills and the mortgage. Perhaps they have to hire someone to help with cleaning or other household chores because they aren't able to balance a job and home life.

A life insurance benefit can also give financial security and the ability for your partner to take enough time off from work to grieve.

If you have children
Your partner will likely have to either hire childcare or become a stay-at-home parent after you pass. This alone can cost hundreds of thousands of dollars throughout the child's life.

Salary.com reports that if a stay-at-home parent were compensated, they would earn nearly $115,000 per year. Main at-home duties include:

  • Cooking
    Hiring a personal chef to take care of the cooking and meal prep could cost $200 - $300 per week for five meals for a family of four (not counting the cost of groceries). That's $11,200 - $16,800 per year.

  • Cleaning
    The national average to hire a housekeeper is $160 per session, anywhere between $8 - $17 per hour. That's likely around $320 per month, or nearly $4,000 per year. If you have small children, you'll probably have to hire a cleaner more than twice per month, doubling or even tripling the cost.

  • Childcare: One in three families spend 20% or more of their annual household income on childcare. The average weekly cost of childcare at a daycare center is about $200, according to Care.com. For just one year, you could pay $10,000 or more for just one child.

Other services provided include laundry, carpools, and running errands like grocery shopping, just to name a few. That loss of income can add up quickly.

If you have older children, perhaps paying college tuition is a consideration. The average cost of tuition in 2018 was $34,740 per year for private colleges, $9,970 for in-state residents at public colleges, and $25,620 for out-of-state residents at public college.

If you have a disabled child who will need lifelong support, you should definitely consider a life insurance policy to continue providing for them even when you're gone.

If you have an estate
Your estate is everything you own: your car, home, bank accounts, investments, technology, personal possessions, etc. Whether it's for your family members, other loved ones, or an organization, you should use estate planning to ensure your wishes are carried out.

If your estate owes substantial debts and taxes after your death, a life insurance death benefit can help to pay those taxes. It also helps prevent your family from having to quickly sell your assets to raise cash to pay bills.

Life insurance coverage remains separate from assets named in a will. That means you should name one or more beneficiaries to receive the death benefit.

If you have debts or loans
Federal student loans are forgiven if the borrower dies. However, private student loans do not offer this forgiveness—the debt is typically transferred to the loan co-signer. In most cases, this is the parent(s).

A life insurance policy can give them the monetary assistance they need to make payments.

If you own a business
A death benefit could help a business partner or co-owner continue to run the business after you are gone. It could also be used for a buy-sell agreement, in which the partner can buy out the remaining shares of the business from your family.

Read on to learn the best time to get life insurance coverage.

Who Doesn't Need Life Insurance?

Some people may not need life insurance coverage. These include:

Those without Insurable Needs
If you are in your early 20s and don't have any significant debts, a spouse, or children to care for, you may not need life insurance.

The same is true if you are a senior or retired with enough savings to last through retirement and take care of funeral expenses, you probably don't need a policy.

Children
Your child has no income needs to be replaced if they die. Also, depending on the policy, any interest/cash value is earned at a predetermined rate set by the insurance company.

Unless the policy guarantees minimum cash value, the growth rate can fluctuate year to year based on the earnings/profit of the company. And fees associated with the policy may decrease the actual cash return.

Rather than purchase a life insurance policy on behalf of your child, simply name them as a beneficiary on your policy.

Life Insurance by Age

Your life insurance needs depend on your age and your individual circumstances.

The Young
More than 70% of young adults say they don't need life insurance because they are young and healthy. Nearly half of millennials also overestimate the cost of life insurance.

But when you are young and healthy is actually the perfect time to purchase life insurance. You'll get the best monthly premium rates on a policy because the insurance company is taking on less risk by insuring you.

This will change as you age. Even if you remain healthy, your premiums will rise every year.

Of course, your circumstance may also determine whether you need coverage, including major events like:

  • Getting married
  • Buying a house
  • Having children

Buy insurance when you have insurable needs—someone who depends on your income, or debts someone will need to take care of if you die.

The Middle Aged
Your needs will change as you age. Your children will grow up and move out, you'll eventually pay off your loans and mortgages, and at some point, you may not need coverage.

If you are at this later stage, a short, low death benefit term policy will ensure coverage and assistance for a funeral and end-of-life costs.

Seniors
If you are a senior and do not have life insurance, it's not too late. Some companies offer final expense life or guaranteed life insurance that provide coverage specifically for funeral and other expenses.

How Do I Calculate My Coverage Needs?

Here's an easy and in-depth way of calculating the right amount of coverage for you.

Simple
It may be helpful to create an Excel or Google Doc outlining each of these factors for you (and your spouse if you are married).

  1. Consider how many years need coverage.
    Multiply your annual income by that number of years. For example, if you opt for a 10-year term policy and earn $60,000 per year, you'll want a minimum $600,000 policy.

  2. What other financial obligations do you want your policy to cover?
    This can include:
    1. Funeral costs
    2. Mortgages
    3. Student loans
    4. Credit card debt
    5. Medical bills
    6. Childcare

  3. What services do you provide that would have a cost to replace?
    This is particularly important if you are a stay-at-home parent and your partner wouldn't be able to quit their job to provide the services you do.

  4. Do you have any savings or life insurance through a current employer?
    You'll want to subtract those totals. But remember, most companies offer a life insurance policy for full-time employees.

    That coverage is usually only 1-3 times your current salary, which likely isn't enough for your needs. Also, if you leave that job, you lose the coverage.

Find a life insurance calculator online. They'll ask questions and offer a good estimate of what you may need.

In-Depth
First, you'll want to create an Excel or Google Doc to keep track of your totals. Both you and your spouse (if applicable) should answer all of the below outlined questions.

  1. Enter your current income and expenses.
    Start with your monthly take-home pay (after taxes and other payroll deductions). This should be calculated for both of you and added together.

    Then, add up all of your monthly expenses. These can include:

    • Household expenses: mortgage/rent, taxes, maintenance, utilities, electric, internet, cable, average grocery cost, etc.

    • Personal expenses: clothing, personal care, pets, education, medical expenses, etc.

    • Children: childcare/babysitting, clothes, school expenses, etc.

    • Transportation: gas, maintenance, parking fees, etc.

    • Debt: student loan, credit card, auto loan, etc.

    • Other: restaurants, entertainment, traveling, subscriptions, gifts, electronics, etc.

    You likely have insurance (health/dental/vision), 401(k), disability, and employer life insurance taken out of your paycheck, so you should be aware of how much you pay each pay period.

    If you are a stay-at-home parent, you should include these expenses in your total monthly expenses outlined above.

  2. Project income changes in the case that either spouse dies.
    This gives you an idea of the potential gap in income.

    Take your total expenses found in Part 1 and subtract one income, keeping in mind that:

    • You may adjust your contributions to your 401(k) up or down based on your needs.

    • You might be newly enrolling in a health insurance plan, or switching to a different plan. This may increase or decrease health insurance costs.

    • Your tax deductions may change based on a change in income or addition of dependents and federal allowances.

    Understanding the difference of two versus one income compared to your monthly expenses calculated in Part 1 will help you understand what difficulty there may be in affording those expenses should one parent die.

  3. Project spending changes in the case that either spouse dies.
    A lot can change should one spouse die prematurely. While it's difficult to calculate what exactly those changes are and how it will affect you financially, there are a few cost changes worth considering.

    • Childcare
    • Mortgage/rent
    • Health insurance
    • College savings for child(ren)
    • Retirement savings needs

    Consider how long you want your life insurance policy to be able to support the living spouse and/or your children.

  4. Outline your debts.
    List any current debts you currently have, including

    • Student loans
    • Credit card debt
    • Mortgage
    • Auto loans
    • Other money you owe

    Then consider how much of that debt you'd need your life insurance policy to pay off.

  5. Determine how many years of income you'll need to replace.
    If you have small children, you'll likely be supporting your child for the next 17 years. The estimated cost of raising a child in 2018 according to the U.S. Department of Agriculture was $234,000.

    If you have more than one child, you can multiply that sum for as many children as you have. That adds up quickly.

    While your insurance policy likely won't support them for the full 17 years, you may decide you want to plan for five or 10 years of support to give the surviving parent time to grieve and get back on their feet.

    You may want to estimate for even longer depending on the ability of your partner to make up the gap in income.

  6. Determine lump sum needs and wants.
    This is when you would think about additional expenses you want to cover with your policy.

    • Do you want to pay off most or all of your debts?

    • How much do you want to contribute to end-of-life costs, like a funeral and medical care?

    • Do you want to leave an amount to your children for college education? How much?

    • Do you want to contribute dollars to future new cars, houses, weddings, or other large expenses?

  7. Determine what will be covered by Social Security.
    Some of your life insurance needs may be covered by Social Security. Start by pulling your Social Security statement from the SSA website. Look at the "Survivors" section. The three numbers there represent the three benefits your family could be eligible for.

    • Your child
      This monthly amount would be paid out to each child who is unmarried and under the age of 18.

    • Your spouse
      This monthly amount would be paid to your spouse as long as he/she remains unmarried and still has dependent children under age 16.

    • Total family benefits
      This monthly amount is what would be paid out across all eligible recipients.

    By adding these three numbers together, multiplied by 12 (months in a year), you can estimate the annual Social Security contribution.

    Depending on how many years your family could expect to receive these benefits, you may want to subtract this total from your monthly needs.

  8. Add any savings available to cover your needs
    This is the time you would calculate any savings you have set aside for monthly expenses, paying off debts, or "for fun" allocations.

    You should not include savings you have in a retirement fund, emergency fund, or other savings designated for a specific goal like vacation or car maintenance. Keep those totals separate.

  9. Review final life insurance needs
    Analyzing what your current monthly income is, minus monthly expenses and debts, gives you an idea of how you look financially with both partners in the picture.

    Now, subtract out one partner's income and add in additional expenses, like childcare, that would be taken into consideration should one of you die. This gives you the gap in income that would need to be covered in the event of your passing.

    Multiply this gap by 12 to give you an annual sum.

    Then think about changes in spending if you die, like the addition of childcare expenses. Add that into the income gap. Also add in total lump sum needs and wants for your children, like a wedding or college tuition savings.

    Once you have a total gap in income and expenses, subtract your additional savings and what would be paid by Social Security, if applicable.

    This should give you an idea of how much you'll need covered for one year. Multiply this number by the total number of years you want to provide financial support. You may find this equals $500,000 - $1 million or more. This is not uncommon.

Feeling overwhelmed? Talk to a life insurance agent.

Their job is to ask the questions and gather the information necessary to calculate your life insurance coverage needs. You could also meet with a financial planner.

Applying for Life Insurance

Most companies offer the ability to either request a quote or get a quote online.

Request a Quote Online
Enter and submit basic contact information. That will be provided to a life insurance agent who will follow up via phone or email (depending on your preference).

They will ask questions like:

  • Why do you need life insurance?
  • What kind of coverage are you looking for?
  • How long do you want coverage?

Once they get your answers, they will provide quotes from different companies.

Get an Online Quote
If you get a quote online, you will answer questions like your:

  • Gender
  • Date of birth
  • Height and weight
  • Desired coverage amount
  • Basic health questions

You will have to do this for every company you are considering. Once you submit the information, you will either be emailed or immediately shown a quote.

Remember, life insurance quotes are subject to change based on the answers to your application questions and/or results of your medical exam.

Talk to an Agent
You can provide an agent directly with all of your contact and health information and they request the quotes for you.

There are two main types of agents:

Captive Agents
These only work for one insurance company. They are required to meet certain policy sales quotas for that company.

While this makes them the experts, they are not able to quote you with different companies in order to find the best premium options for you. Their company also might not offer the type of policy or specific coverage you need because not every life insurance company is the same.

Independent Agents
These typically own their own business and represent several insurance companies or carriers. They are able to quote with different carriers and sell products that are best for you and your budget.

They often have a significant understanding of life insurance, the market, and the products that are available to you.

Independent Agents likely will not try to push a certain product or company because of the salary they earn from them.

Once you decide which quote and company is right for you, you'll submit an application for the policy. You'll be asked to answer additional questions like your age, marital status, occupation, and basic health history.

Applying for Coverage

Once you decide how you are going to purchase your policy, get your quote, and select your best option, you'll have to actually apply for the policy.

There are three main ways you can purchase life insurance:

  1. Directly from an insurance company
    While this route typically ensures buying from a large, reputable insurer, it also may not get you the best price.

  2. Through an insurance agent
    Independent agents generally represent multiple companies, so they are able to compare more prices and often get you a better quote.

  3. Through an independent online broker
    Purchasing online may seem faster and easier, but keep in mind life insurance policies and costs can be confusing, so it may be more difficult to do it on your own.

This process could take as little as 24 hours or up to several weeks, depending on the policy and company.

First, you'll need to speak with an agent to verify information you provided during the quoting process, answer additional questions about your needs, and confirm that the quote you selected is best for you.

Usually you'll be sent paperwork that you also have to fill out and sign to verify your intent.

The application process generally works the same for most companies:

  • For non-medical exam policies
    You'll answer some general questions online about yourself, your health, and your coverage wants and needs. Based on your answers, the company will decide whether to insure you or not. Underwriting often happens and coverage is obtained within 24-48 hours.

  • For medically underwritten policies
    You'll have to fill out the application online to answer general questions about yourself, your health, and your coverage wants and needs. You'll also have to schedule and participate in a medical exam, and the results will be sent to the insurance company.

Once complete, the information will be sent to the insurer who will analyze the results and decide whether to insure you or not, as well as what to charge as your monthly premium.

When your policy is approved, you'll be notified and receive a full copy. Typically, you'll also be asked to make the first premium payment.

Before finalizing your purchase, read through the terms of the policy carefully.

Make sure you understand:

  • Which type of policy you have
  • Renewal details
  • Year-to-year variances
  • Benefits or fine print for the policy dollar allocation
  • Interest on the policy

Take time to understand what is and isn't covered by your policy, if there are contingencies on the payout, or barriers to canceling the policy.

Also make sure you are able to afford the monthly premium payments long term. Consider what will happen if you lose your job or have to tap into your savings for an emergency.

Always make monthly payments on time to avoid a lapse in coverage.

Life Insurance Mistakes to Avoid

Immediately opting for a no-exam policy.
While no-exam policies have faster approval times and are generally easier to get, you could pay a much higher premium. The insurance company knows less about your health and therefore takes on a higher risk by insuring you.

Here are some cases where a no-exam policy makes sense:

  • You are older or are in poorer health and won't qualify for a traditional policy, or you've been denied coverage in the past.
  • You need quick coverage for a divorce or business loan.

Rushing into a purchase.
Some people who get quotes online and are contacted by an agent feel pressured to purchase a policy right away.

Others buys a single policy when multiples may suit your needs better.

For example, perhaps you won't need $1 million in coverage for a full 20 or 30 years. Instead, you can purchase a 10-year policy for $500,000 and a 20-year policy for $500,000. That way, you have $1 million in total coverage, but you won't have that full coverage for all 20 years if you don't need it. This could save you dollars in your monthly premium.

Avoid these and other frequent application mistakes like:

  • Not comparing companies

  • Paying too much

  • Settling for the first company you find

  • Assuming you only have one or two options

Make sure you and the agent you are working with take the time to really understand what your life insurance needs are and what type of policy and coverage amount is best for you.

Not understanding policy features.
When comparing options, pay particular attention to these policy features:

  • Death Benefits
    Understand what percentage of the death benefit will be paid to your beneficiary, and know when it will be paid out. For example, some companies take two or three years to reach 100% payout.

  • Premium Amount
    Know how much your monthly premium will be and when it is due. Think about the affordability of the premium, especially if something were to happen so that you didn't have a steady income for a few months.

    Typically no-exam policies cost more, so if you can't afford the premium, you may want to take the time to complete a medical exam for a lower premium. If an exam policy is not an option, make sure you compare different company quotes to get the most affordable premium.

  • Insurance Carrier
    After you get a few different quotes from different companies, you'll want to research the companies before making a final decision—price isn't everything!

    Look at star ratings and reviews on the company, both professional (like Standard & Poor's, A.M. Best, Fitch, and/or Moody's) and peer (current or past customers). Pay attention to their financial strength and claims paying reputation, as well as customer service.

  • Type of Policy
    There are two primary types of life insurance policies - term and whole. While not all insurers offer both types of policies, you should check to make sure the company you are considering offers what you need.

  • Term
    This type of policy offers coverage for a "term," or specific length of time. Typical terms are 10, 20 or 30 years. This type of policy is generally cheaper and easier to get, and when the term expires, the coverage does as well. You'll want to opt for a term policy if you only need coverage for a specific period of time, such as when you're raising children.

  • Whole
    This type of policy lasts for your entire life. While the premium is typically more per month, it also accrues cash value and has an investment portion that helps increase the overall value of the policy.

Bottom Line

You should get a life insurance policy if:

  • You have children.

  • You are married.

  • You have debts or loans, especially if you have a co-signer.

  • You want to provide an inheritance to beneficiaries after you die.

  • You want to provide financial support for end-of-life expenses and/or a funeral.

  • You want to provide support for estate planning and taxes.

You probably don't need a life insurance policy if none of the above scenarios apply to you, you are a senior or retired, or you have sufficient savings to pay for end-of-life costs.

Talking to a life insurance agent or using a life insurance calculator can help you decide if you need coverage, how much of a death benefit you need, and how long you need coverage for.

Generally, it's best to be on the safe side and provide your family and loved ones a financial safety net after you die.

Write to Caitlyn Callahan at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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