Should you buy life insurance? At some point in your financial journey, you are going to come across this question. Maybe you heard a friend or family member talking about the importance of life insurance. Perhaps you have heard someone talking about life insurance as an investment. Maybe you are even just curious how it should fit into your financial plan. Whatever the reason might be, in this post, I am going to help you crack the code of whether or not you need life insurance, what type of life insurance you should consider, and of course, how much? Before we dive into all of that, I want to first explain the purpose of life insurance.
What’s the point of history insurance?
The easiest way to answer this question is to ask yourself: does anyone depend on me for my income? If the answer is yes, then odds are you should have life insurance. If the answer is no, it might still make sense to purchase life insurance, but most of the time, it won’t be necessary, but more on that to come. Ok, so someone depends on you for your income – maybe you have a family and you and your spouse both work, perhaps you are the primary breadwinner for your household, or perhaps you support your parents or siblings. Whatever the case may be, if someone depends on you for your income and you were to pass away, they are truly left out to dry. That is where life insurance comes in. Life insurance is there to supplement your dependents by replacing the income you were making or merely covering the expenses after you are gone. Easy enough, right?
When to buy vs. not to buy
Let’s now explore some of the nuances of when to buy vs. not buy life insurance. What if mom works full time as the primary breadwinner and dad stays home with the kids – who needs life insurance? Mom definitely needs life insurance because if she were to pass away, they would need to replace her income, but what about dad? Just because dad’s work in the home is not “Paid” does not mean that dad doesn’t need life insurance as well, because if dad were to pass away, mom would need to either cut back at work to take care of the kids, or hire help to come into the home, and both of those situations would cost them money. So yeah, mom and dad both need life insurance in this situation.
Now, what about a single person with no dependents – should they still buy life insurance? Ultimately, it is up to you, but you likely do not need life insurance unless you are planning to support someone in the future. For example, let’s say you have some nieces and nephews that you would like to help send to college – if you were to pass away, you wouldn’t be able to make that contribution, but if you had life insurance, you could make sure that some of the proceeds went towards helping them out with college costs. At the end of the day, who needs life insurance is an incredibly personal decision, but the best way to start the conversation is to think about who depends on you for your income, either now or in the future. Alright, now that you’ve decided whether you need life insurance or not, let’s talk about which type of life insurance.
What type of life insurance?
When it comes to different types of life insurance, things can quickly get much more complicated than they need to. I am going to help keep it very simple and say this: the majority of the time, term life insurance is going to be the best fit. There is another type of life insurance called “permanent” that can be beneficial in very obscure situations with estate planning for high net worth individuals, BUT in the majority of cases, the costs and complexities of permanent life insurance far outweigh the benefits. Without diving too deep into the weeds – you might come across individuals who are really selling permanent life insurance and trying to convince you of the benefits, but at the end of the day, you need to realize that the only people really pushing permanent life insurance are those that earn a hefty commission from selling it. Take a good look at the incentive structures for these salespeople and take all of the advice with a grain of salt.
So all that to say, stick with term life insurance. It is very straightforward, you pay a premium each month to be insured for a specific amount and purchase it for a specified “term,” usually 20 – 30 years. The great thing about term life insurance is that it is cheap for younger individuals because your likelihood of passing away during that period is so low!
So to recap here – diving into the details of life insurance can get tricky and complex, but for the majority of people, term life insurance is the best fit.
How much life insurance do you need?
So you have decided you need life insurance, you have decided you are going to buy term life insurance. Now you are wondering: well, how much do you actually need?
There are a few different ways to calculate how much insurance you need. You can focus on replacing your exact salary, OR you can focus on covering the household expenses. Sometimes people focus on a combination of replacing income and then paying off a large debt such as the mortgage with a lump sum as well. Here are a few other things to think about as you are making this calculation:
- Do you plan to send your kids to college in the future, and how much will that cost?
- Do you want a lump sum set aside as an emergency fund?
- How much income are you trying to replace each year?
- Are there any lump sum payments you would like to make either towards an outstanding debt OR to a specific individual?
As you answer each of these questions, you will start to gain a clear understanding of what your total life insurance needs are.
Ultimately there is no right or wrong answer, as long as you are accounting for the needs of your situation. One of the best ways to figure out your exact needs is to use an online calculator to walk you through step by step.
Where to buy term life insurance?
Alright – you’ve decided you need life insurance, you know you want term, you know how much you need – the last step is putting the rubber to the road and purchasing a term life insurance policy.
We are so fortunate to live in a time where we have the ability to shop around, compare quotes from a number of different companies, and make the best decision with all the available information. A fantastic company that I highly recommend for purchasing insurance of any type is PolicyGenius. They are an insurance marketplace that makes the shopping process incredibly easy and competitive by bringing the business to you. You simply fill out a questionnaire, decide how much you are looking to purchase, and they help you compare quotes from a number of different providers, without any heavy lifting on your part. I highly recommend them for your life insurance needs.
Another great place to purchase term life insurance is from a company called Ladder. They do a great job of simplifying the entire process. They have some cool features as well where they allow you to increase or decrease the amount of life insurance you have very easily as life circumstances change.
PolicyGenius and Ladder are two great places to purchase term life insurance, but there are a number of other options that could be a good fit as well. The biggest thing to look for is a competitive price and an easy to use website.
To sum it all up: not everyone needs life insurance, but it is a conversation that everyone should have. Term life insurance will be the best fit for most people because of its low cost and simplicity. How much life insurance is a very nuanced question, as long as you consider the main points and using a good online calculator, you can land on the right amount for your situation. Lastly, there are many good options for where you can purchase term life insurance; just make sure you compare offers and get the best deal possible.
Drop a comment below if you have questions, and don’t hesitate to share this with anyone that it might help!