Should I Have Life Insurance?

Insurance is always a tricky subject to talk about because nobody wants to think about what may happen in a worst-case scenario.

And like most questions in personal finance, there isn't really a one-size-fits-all answer.

But the #1 question you should ask yourself to determine if you should have life insurance is:

"Does anyone rely on me financially?"

If the answer is yes, having life insurance may make sense because the purpose of life insurance is to provide financial support for your dependents after you're gone.

If the answer is no, you may not need life insurance just yet.

Here are a few examples of scenarios where it would generally make sense to have life insurance:

1) If your spouse, partner, or children rely on you for income

  • Let's say someone had a wife & kid and while the kid is growing up, the wife is staying at home to raise them to save money on child care costs
  • If the husband's job is the only source of income for the family, his death would have an impact on them financially so in this situation having a life insurance policy that can provide income for them would generally be recommended

2) Someone would inherit your debt

  • Similar situation, but let's say both spouses are working. It may make sense for both of them to have a life insurance policy because if they lost one source of income, it may be difficult to pay off debt such as the mortgage, student loans, or car loans

3) You own a business

  • If someone owned their own business and has people working for them, life insurance can help cover business expenses in the event that they pass, and will keep the business operating amidst a transition
  • If someone had a business partner, it might make sense to establish a buy/sell agreement. This would mean that if the first business partner passes away, the other receives a death benefit that can be used to buy the remaining half of the business.

Two types of life insurance:

1. Term insurance

Term life insurance is generally the cheaper and more affordable option between the two and because of this, is usually the better choice for most people.

Term life policies can last for 10, 20, 30 or another set number of years. You can customize term life insurance to cover the years when your death would most impact your family, and then reassess in the future when they may able to support themselves without your life insurance.

2. Permanent insurance

Permanent life insurance lasts from the time you buy a policy to the time you pass away, as long as you pay the required monthly premiums. There are a few different types of permanent life insurance such as whole life or universal life, but permanent insurance typically costs more than term insurance.

Generally speaking, term insurance usually makes more sense than permanent insurance for people who are younger (in their 20s, 30s, and 40s) and an important note - insurance tends to get more expensive as you get older.

This is a chart from Forbes that shows average costs of a million dollar term life insurance policy:

In this example, for a 30-year-old male, a $455/year premium comes out to around $38/month.

That means that if they bought an insurance policy today and died a year from now, they'll have only paid $455 and their beneficiaries would receive a $1,000,000 payout (after filing a death claim with the insurance company).

The payout can be used however the beneficiaries would like and is most commonly used to cover expenses such as funeral costs, mortgage payments, other debt payments, regular living expenses, education expenses, etc.

(If you would like to specify how the money is to be spent, that needs to be addressed within a will)

Now, how much life insurance do you need?

While it definitely depends on your situation, one general rule of thumb to get a rough estimate is to multiply your income times 10 + $100,000 per child for college expenses.

So if you had 2 kids and made $75,000/year, this calculation would estimate that you may need almost a $1,000,000 policy.

And according to Policy Genius, the average cost for a $1,000,000, 20-year term life insurance policy for a 35-year-old male is $53 per month.

The numbers will be different for everyone, but here's a life insurance calculator from NerdWallet that lets you input your information and shows how much life insurance you may need.

Now, purchasing an insurance policy can be a separate headache in itself due to the very 'salesy' nature of insurance representatives.

If you're looking to purchase a life insurance policy, don't be afraid to shop around online first to get an understanding of what the monthly costs may be and if you decide to purchase through an insurance rep be sure that you know how the person selling it to you is getting paid, how the policy works, and how much you'll be paying in monthly premiums.

There are other intricacies when it comes to life insurance, but this breakdown touched on some of the general information that you need to know.

If you have a family and/or people depend on you financially, it might make sense to get life insurance sooner rather than later - especially if you're in good health and can get a lower rate when you're younger.

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