People may wonder, "How do I know if I need life insurance?" at any age. This question may come up at an important milestone in life or while doing estate planning.
Who really needs life insurance? Without question, the family breadwinner should have a policy. You may also consider other life circumstances where life insurance could come in handy for someone you care about. In addition to your spouse, life insurance may benefit your parents, children, or business partner. You can even leave the proceeds of your life insurance policy to a charity if you wish.
This article explores how to determine your life insurance needs, when and how much to buy, and how to choose the right life insurance policy.
How to determine your life insurance needs
The rule of thumb in knowing who needs life insurance is whether someone relies on your financial support for their well-being. Those who depend on you financially might include your spouse, life partner, children, elderly parents, co-signer, or business partner. A good way to look at life insurance is to consider your current finances to determine who would be affected by the loss of your income.
How would your family’s financial picture change if you died? Your family or other loved ones may have to relocate, find employment, or get extra help at home. If you have co-signed on a loan or have a business partner, you would be leaving the entire debt to someone else. The loss of a stay-at-home parent might require the remaining parent to pay for services the other parent provided, such as childcare, errand running, or laundry.
How do you decide if you need life insurance? if any of the following circumstances apply, you should buy a policy:
- You are the family breadwinner
- You have a spouse or life partner
- You are a stay-at-home parent
- You provide financial support for a disabled child or your parents
- You have a mortgage on your home or other property
- You are a co-signer on a debt
- You have a business partner
- Your employer provides a group health plan
If you have a group life insurance plan through your employer, you may still need life insurance as you may lose the policy when you leave the company.
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When is the best time to buy life insurance?
Young adults may question, “Why buy life insurance if I’m young and healthy?” Older individuals may ask, “Why buy life insurance after I retire?” The reality is it is never too soon or too late to invest in life insurance.
Young people commonly delay purchasing life insurance because they have other financial priorities and don't think about death. Life insurance premiums will never be less than when you are young and healthy. Affordability is a good reason to purchase life insurance.
While life insurance will cost more during the retirement phase of life, certain situations may warrant a life insurance policy. For example, a small-term life policy could be helpful if you still need an income or have debt when you reach retirement age. Life insurance may also be prudent if you want funds to cover your funeral expenses or estate taxes.
Common life insurance terms
The life insurance industry uses industry terms that you may not be familiar with. The following common terms will more greatly inform you as you explore your options:
- Term life insurance. A life insurance policy with a limited term, usually between 10 to 30 years.
- Permanent life insurance. Also called whole life insurance, this policy lasts for the insured’s life as long as premiums are paid.
- Premium. The payment the policyowner makes in exchange for the policy.
- Policy owner. The person who owns the policy and is responsible for paying the premium. This person may or may not be the insured person.
- Beneficiaries. The person or persons who receive a payout upon the insured’s death.
- Face value. Also known as the face amount, this term refers to the amount stated on the policy to be paid when the insured dies.
- Cash value. Cash that accumulates in a permanent life insurance policy in addition to the face amount of the policy.
- Cash surrender value. The amount of cash value due to the policy owner if they cancel the policy before they die or the policy ends, which may include a surrender charge, outstanding loans, or interest.
- Evidence of insurability. This term refers to a statement that shows proof of your health, finances, or occupation, which may have a bearing on the policy approval or rating.
- Free look provision. Also called the free-look period, you have a certain amount of time (usually 10–30 days) to review the policy and receive a full refund if it does not meet your needs.
How much life insurance to buy
When applying for life insurance, you will need to consider how much money your loved ones will need when you die.
Here are five ways to determine an appropriate life insurance face amount:
- Multiply your annual income by 10. A variation of this is to purchase 10 times your salary and add more for large debts or children’s college expenses.
- Use the DIME formula. The acronym represents debt, income, mortgage, and education. The total balances combined equals your life insurance amount.
- Cover your mortgage balance. The U.S. Bureau of Labor Statistics states that consumers spend just over 33% of their monthly expenses on housing costs.
- Cover your debts and final expenses. Combine your outstanding debts and final expenses other than your mortgage.
- Cover the cost of your children’s future college expenses. The National Center for Education Statistics reports that the average cost for a full-time undergraduate education ranges from $26,000–$55,800.
Be sure to consider any existing life insurance coverage, savings, and investments when making your calculations.
How to choose the right life insurance product
When evaluating your options, being clear on your purpose for buying life insurance is helpful. It is also prudent to consider how much of your budget you can allot for the premiums.
Term life insurance policies almost always carry the lowest premiums. They are a good choice for those on a tight budget. Just be aware that when the term ends, the coverage ends with it. An exception to the rule is a return of premium life insurance company, which refunds your premiums if you outlive the policy.
By contrast, the premiums for permanent life insurance policies are higher, yet your beneficiaries will receive the full face amount plus any cash value the policy accumulates.
Beyond the cost of a policy, consider why you need life insurance:
| Do your loved ones need it to replace your income or pay outstanding debts? |
| Consider income replacement and settling debts (e.g., car loans, student loans, mortgages, etc.). |
| Do you only need enough to cover your final expenses? |
| Life insurance can help cover burial costs, relieving your loved ones of financial strain. |
| Would a life insurance policy be valuable for your long-term financial goals? |
| The cash value of a whole life policy can be used for investment purposes, or allocated for final expenses and estate taxes. |
A licensed life insurance professional will answer your questions and help you choose the best policy for your circumstances.
Recent regulatory trends in the insurance industry
Individual state governments regulate the insurance industry, so laws vary between states. Licensed insurance agents are made aware of any changes that might affect your decision on which policy to buy. Some recent changes in the insurance industry are related to significant issues in the news.
For example, state governments are concerned with climate risk management. Climate risk management refers to assessing climate risks and managing them. Governments are also considering data privacy and cybersecurity issues to ensure insurance companies protect consumer privacy.
Artificial intelligence is another issue on the government’s radar. While AI can assist with risk assessment, there is a concern about AI creating biased outcomes. The most significant regulatory concern is insurers staying financially strong to protect policyholders’ interests.
You are bound to have more questions as you explore your options for life insurance. There is much to learn about life insurance. Healthnews offers many articles to inform you about the various types of life insurance and how they can protect your family.
FAQ
Why do I need life insurance?
You need life insurance if anyone would suffer financially if you were to pass away unexpectedly. Think about how your loved ones or business partners would carry on without your income. You may purchase it to cover large debts, provide income, pay final expenses, or as an investment.
At what age should I buy life insurance?
Buying life insurance when young and healthy is best, as the premiums will always be the lowest. Typical milestones for buying life insurance are when someone gets married, has children, or purchases a home. Older individuals may also want to buy life insurance to cover debts or pay burial or funeral costs.
What happens if I buy a life insurance policy and change my mind?
All insurance policies have a free-look period, giving you time to review the policy face amount, terms, and conditions. The policy will state how many days you have to review the policy, which is usually between 10–30 days. If you no longer want it, you can return the policy and receive a refund for any money you paid.
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You need life insurance if anyone depends on you for financial support, including your business partner, spouse, children, disabled child, elderly parents, or anyone else.
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People of all ages may need life insurance. Your purpose in buying life insurance will guide you in choosing the right policy and face value.
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Understanding life insurance terms makes it easier to make the best choice of policy.
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When considering a life insurance amount, include your income and debts, such as your mortgage, loans, final expenses, and children's education funds.
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The life insurance industry is highly regulated and evolving. A licensed insurance agent can give you updates about any changes that may affect your buying decision.
6 resources
- NAIC. NAIC announces 2023 regulatory priorities.
- NAIC. NAIC adopts change to better monitor life insurer investments.
- U.S. Bureau of Labor Statistics. Consumer expenditures 2022.
- Deloitte. 2024 global insurance outlook.
- Deloitte. 2023 regulatory outlook.
- National Center for Education Statistics. Tuition costs of colleges and universities.
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