“Do I need life insurance?”

Probably. 

Here’s the thing, you’re probably going to live a long and happy life. One in which not major bad things happen to you. But what if something did?

What if you died before you’re supposed to? What would the consequences be? The answer to that question will be the determining factor for whether or not you need life insurance. Commonly, people discover the consequences of not having life insurance outweigh the costs of having it. 

My first job out of college was selling life insurance with New York Life. All told, I spent 10 years with the company and “retired” with a pension. While in the initial training, one of the veteran agents said, “You’re not in the insurance business until you deliver a death claim.” A death claim is when the insured dies and the life insurance company pays the policy’s face amount to the beneficiary. It took a couple of years before this happened, and it was a profound experience. 

When someone dies, it’s a traumatic and chaotic time. There are arrangements to be made, and a seemingly infinite number of details to attend to. And there are costs, expenses and bills to be paid. While there are many people who show up to pay their respects, very few show up with money. That’s what life insurance does. 

Life insurance provides liquidity, often when it’s needed most. 

Today, I’m an independent, fiduciary financial advisor and I’ve been helping people get better at money for over 20 years. I know all too well the importance of life insurance, the problems it solves, and the problems it could have solved for many families without it. 

My goal here is to help you determine if you need it. 

Here’s what we’ll cover:

  • Being compelled
  • When you can’t afford life insurance
  • Additional scenarios
  • Who doesn’t need life insurance
  • The actual cost of life insurance and the right amount

Let’s get started.

Being compelled

We’re compelled to do a lot of things. We’re compelled to pay and file our taxes, buy car insurance (in some states), and show up to our jobs. We’re not compelled to save money for retirement, eat right and exercise, nor are we compelled to buy life insurance. 

Here are some factors that should compel you to buy life insurance. 

When you love someone

When you’re married with no kids, you should still have life insurance. When a spouse dies, the life of the surviving spouse will be greatly disrupted. They will need time to mourn. They may need time away from work. Too often, personal tragedy can result in financial disaster. There will be bills to pay, and there may also be medical bills to pay. 

When you have kids, you should buy life insurance. Although I’ve never thought about it, this should probably be compelled. Your life has changed and you need life insurance. 

When you owe someone

While some debts may be discharged upon your death, many will not. Leaving your loved ones with your debts is an awful and selfish thing to do. 

When you start a business

Becoming an entrepreneur is exciting and it carries with it additional responsibility. If you have partners, you need life insurance to fund buy-sell agreements. If you’ve taken out loans, or you have employees, you need life insurance. 

When you can’t afford life insurance

When you’re married and just getting started in life, you may need life insurance. If the two of you are having a hard time living off one income, you need life insurance. If the two of you are having a hard time living off of two incomes, you need life insurance. If you’re in this scenario, and feel like you can’t afford to buy life insurance, the answer is “Then you can’t afford to not have it.”

Additional scenarios

When you’re illiquid, you need life insurance. I mentioned earlier how life insurance creates liquidity. If you’re a real estate investor, business owner, art collector, crypto investor, or someone else with their money tied up, you need life insurance. 

Just because you’re a millionaire on paper, doesn’t mean your loved ones wouldn’t benefit from liquidity in case of your death. 

Who doesn’t need life insurance

If no one  would be financially or emotionally damaged by your death, you don’t need life insurance. 

All that being said, it could still make sense for you to own it. Odds are, it’s less expensive than you think it is. 

The actual cost of life insurance, and the right amount

A life insurance policy’s premium is determined by the amount of death benefit, the type of coverage (term or permanent) and the duration of the policy (how long it lasts for), and your health and lifestyle. A $500,000, 20 year term policy on a 40 year old costs around $26 a month.

Is that less than you thought?

So, how much should you have? At a minimum, you should have 10 times your annual income as a death benefit. Two additional ways to think about coverage amounts:

  • Human life value: This method adds up your future earnings and suggests the total as the appropriate amount of coverage. For example, if you earn $50,000, are 30 years old, and intend to work until age 65, you’d buy $1,750,000 of life insurance (50,000 X 35).
  • Full coverage: This method seeks to replace your income indefinitely. If you earn $50,000, you’d multiply that number by 20, so full coverage would be $1,000,000. Should you pass away, you’re heirs could conservatively invest that money and obtain a 5% rate of return, which would provide them with $50,000 in perpetuity. 

What’s right for you? That’s what I’m hoping to help you figure out. 

Closing thoughts

Fundamentally, my hope is that you take action. Figure out what the proper death benefit is, then figure out which type of policy to buy. My recommendation is that you start with 20 year term insurance. 

Once you’re on track to meet or exceed all of your financial goals and objectives, you can entertain and explore fancier types of life insurance, but not before. 

If you’d like additional guidance, you can connect with one of our Certified Partners to help you in your process.

Also, check out our The Right Coverage course to help with all your insurance needs. 

If you’re ready to take control of your financial life, check out our DIY Financial Plan course. 

We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course. 

If you’d like help getting on the same page with your partner, check out our Same $ Page Course. 

If you’d like to help your kids get good with money, check out our Teaching Kids about Money course. 

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