Do I Need Life Insurance?

When people find out I work at a life insurance startup, I almost always get asked, “How do I know if I need life insurance?”

Fortunately, it’s a pretty simple answer: you need to strongly consider life insurance when you have people in your life who rely on you financially.

If you were to die, and the people you love would be left in a precarious financial situation, such as being strapped for cash to pay the mortgage, putting the kids through college or covering basic day-to-day expenses, then you should strongly consider life insurance.

It’s not pleasant to think about death because, after all, we have so much left to do in our lives. However, the unexpected can occur, and it’s important to plan for it. (Disclaimer: Don’t worry, planning for death doesn’t make it happen sooner.)

Life insurance should be part of that contingency plan.

How Does Life Insurance Work?

Life insurance helps ensure that your loved ones are protected if the unexpected occurs. You pay a monthly premium to keep your policy in good standing, and the insurance company pays a guaranteed amount of money (a death benefit) to your beneficiaries as a financial cushion at the time your family would need it most.

This payout could be used toward covering funeral expenses, the mortgage, putting the kids through college or even invested to potentially accrue added value over time.

When Do You Need Life Insurance?

The most common life stages that trigger a need for life insurance are when you get married and have children. That’s because you’re building a life and family with multiple people who likely rely on your income to help pay the bills.

There are other scenarios, though, where life insurance can make sense. For example, Americans are more than $1 trillion in student loan debt. If you are among those Americans, you need to ask yourself, “What would happen to my debts if I died?” For federal loans, they’re most likely absorbed by the government. For private loans, any co-signers you have would likely be stuck paying them off. The same goes for any other co-signed debts you have.

It’s important to know whether or not co-signed debts will be left behind to your loved ones to pay off if you die. If you think that debt burden is likely, a life insurance policy could help pay them off.

If you’ve determined that you need life insurance, then the real answer to when you need it is “now.” Life insurance protects you against the unthinkable, and the unthinkable can happen at any time. Plus, a policy is more affordable the younger and healthier you are.

How Much Life Insurance Do You Need?

The exact amount of life insurance is part art, part science.

A general rule of thumb among financial experts is at least six-to-ten times your annual income. However, you know your financial situation best – i.e. how much liquid savings you have or don’t have, what kind of assets could be accessed in an emergency, etc. That may necessitate a larger or smaller benefit. When deciding on a policy amount, consider:

Mortgage payments
Any co-signed debts
Day-to-day expenses
Putting the kids through college
Funeral costs, medical bills or any other final expenses

Term vs. Permanent Life Insurance

There are two main types of life insurance: permanent and term. Permanent life insurance provides coverage for a lifetime versus a term length. Permanent life insurance comes in two main forms, whole and universal, and has a cash value component that can increase or decrease over time. You can borrow or withdraw money from the policy’s cash value and spend it as you wish. However, loans and withdrawals will impact the death benefit amount.

Term life insurance is characterized by its determined length (term) of coverage — typically 10, 15, 20 or 30 years. Should you die within that term length, your beneficiaries will receive a lump sum payment. Monthly payments for term life insurance are more affordable than permanent policies. For example, a healthy 35-year-old woman could purchase a 20-year, $500,000 policy for about $19 per month. A whole life insurance policy for $500,000 for that same woman would likely cost about $400 per month. Once you reach the end of the policy term length, coverage expires or you can work with your insurer to extend coverage. The premiums will be higher, though, because you’ll be older and potentially less healthy. (Full disclosure: Haven Life, the startup I work at, only sells term life insurance.)

Choosing a Life Insurance Provider

When comparing providers consider the following:

Check the rating of the provider. A company such as A.M. Best does the homework on an insurer’s claims-paying ability and record, to help determine whether the provider is considered reliable and in good financial standing. We’d recommend providers rated A+ or better.
Choose a policy with level premiums and a sufficient duration. When it comes to term life insurance, level premiums mean that your monthly costs will not go up over the length of the term. And your term duration should be long enough to get you past any major expenses, such as a mortgage or when the kids are finished with college.
Pick a process. There are two main ways to buy a policy: through an agent or buying life insurance online. At Haven Life, we’re partial to online because that’s what we offer, and it allows you to get covered immediately and on your own time. But, some people prefer the help of an agent through the entire process, if that’s the case, the traditional method might be a better option for you.

Planning for death can be unpleasant – so many of us put it off. You shouldn’t. If you have loved ones who rely on your earnings, life insurance is a responsible way to help ensure they are financially cared for after you’re gone. Planning for this sooner, rather than later, provides your family with necessary financial security and gives you some much-needed peace of mind.

Image: Wavebreakmedia