Do I need life insurance? How to financially decide

Is life insurance necessary?

The truth is, people generally need some life insurance if they have a spouse or dependents. Depending on your situation, you may need a very small policy to cover end-of-life expenses, or more robust protection to ensure your family is financially stable without you. Broadly speaking, major life and financial milestones such as marriage, having children, and buying a house are key determining factors, but figuring out when to get life insurance is a decision that depends on your situation and personal goals.

How could loss of my income impact my loved ones?

Whether you are the primary breadwinner or not, the loss of income is a challenging situation. It can really impact the future for your loved ones. Some questions you should ask yourself: Do you have a mortgage? Will one income be enough to pay it? What would your children’s lives look like without your income? Do you have any other dependents or family obligations that could be impacted by loss of income? Answering these questions honestly can help you decide how much life insurance you may need.

When should you have life insurance? Common situations

While it’s good to check in on your needs yearly, major moments in our lives are the most common times that trigger the need to reassess your life insurance needs. Let’s review these moments to learn how life insurance can help protect your future and help you work towards your financial goals.

Marriage and shared financial responsibilities

When we begin sharing our lives with a partner, we also share a financial responsibility. This includes setting a budget, sharing bills and responsibilities, and potentially planning a family. Anytime your household exceeds one person, life insurance should be a part of larger financial planning conversation. If the income of one partner is lost, that can have profound effects on the other. Ensuring that your new family is able to meet its needs even if you’re not around is exactly the kind of peace of mind life insurance provides.

Buying a home

Life insurance is a good way to protect this investment and ensure your family can remain in your home should something unexpected occur. If you’re planning on buying a home or would like increased protection for your mortgage, you should consider life insuranceto help protect the outstanding mortgage amount. Options like decreasing term life insurance are designed exactly for this home protection scenario.

Parenthood and dependent care

Having children is another key moment in our lives that requires added financial preparation and planning, to put it lightly. We all want to make sure that our kids will always have everything they need. Part of this preparation should absolutely include life insurance. Knowing that your family will be taken care of even if you or your spouse is not around is the peace of mind that only life insurance can provide.

Expanded caregiving or family obligations

Lastly, another major milestone to consider is retirement and family obligations especially when it comes to caring for aging parents. Life insurance is a great way to make sure your parent’s needs are met in case you’re not there to assist them.

Who doesn’t need life insurance?

If you don’t have dependents or any family members that rely on your income, you may not need life insurance. Also, if you have no debt and have adequate savings for emergencies, then life insurance might not be necessary. However, using permanent life insurance primarily for protection but alsoas a source of  additional income can be a good option for high-net-worth individuals. For instance, the cash value from a permanent life insurance policy can be accessed while you’re still alive but as your protection needs change, it can functionas a flexible, tax-advantaged financial asset that complements other investments.  Please keep in mind that accessing the cash value will reduce the death benefit and the cash surrender value and that distributions must be structured properly to maintain their tax-advantaged status.

How much life insurance do I need?

Now that we’ve covered the reasons you might want life insurance, the next step is deciding how much you need. There are a couple of different ways to go about this, and which you use really depends on your goals. If you’re only trying to cover something specific, like a mortgage, then the math is fairly straightforward, but life isn’t always simple. Here are two ways to approach your life insurance needs:

Calculating coverage based on your financial situation

To calculate your life insurance coverage, first figure out your total expenses over the coverage period. To do this, you’ll need to know specifically what you’re covering. Let’s use your mortgage as an example. If you have $380,000 in mortgage payments remaining, you’ll want to set your death benefit at $380,000. Now, let’s say you also want to include your children’s education to the benefit. If you estimate the cost to be $150,000, add this to total ($380,000 + $150,000) and now your payout becomes $530,000.

Using income multipliers for estimates

If you don’t have a specific number in mind like a mortgage, tuition, or another loan you want to cover, you can use this technique to get to a number. One way to do this is to simply take your annual salary and multiply by eight. Another option that works is to multiply your annual income by the number of remaining years until retirement. These options can give you a ballpark figure to work with. However, to nail down a more concrete number, we recommend consulting with a financial professional who can help you look at the bigger picture as your life and financial needs change over time.

Choosing coverage based on your financial situation

Life insurance is more flexible than you might think. There are multiple ways to use life insurance to not only help protect your future but reach your financial goals. And that depends on your financial situation. To find the right policy for you, review your financial responsibilities both for today and tomorrow.

Term life for temporary financial responsibilities

Temporary financial responsibilities are any obligations that will be paid off after an agreed-upon period. Things like a mortgage, personal loans, and college tuitions are not permanent expenses. Many people use term life insurance policies to cover these types of responsibilities and stop there.

Permanent life for ongoing financial responsibilities

Reviewing all your financial responsibilities before purchasing a life insurance policy is always a good idea. A question you might ask yourself is how much your living expenses cost from year to year. Things like food, healthcare, taxes, and clothing. This can give you a better idea when thinking about your future needs.

Adjusting your coverage as circumstances change

Life insurance doesn’t have to be a one-and-done policy decision. Things happen in life that impact our financial responsibilities. Our families grow, we get promoted, and we start to spend less as we reach retirement. Some people carry multiple policies for different reasons. Others start with an adjustable policy like universal life for more flexibility. Take a good look at all your responsibilities and look at options that will help you reach your financial goals.

Frequently asked questions about life insurance

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